BUSINESS  ADMIXISTRATION 
TEXT  BOOKS 


Business  Economics. 

Business  Organization  and  Management. 

Advertising  and  Salesmanship. 

Trade  and  Commerce. 

Transportation. 

Money,  Banking  and  Insurance. 

Investments  and  Speculation. 

Accounting. 

Auditing  and  Tost  Accounting. 

Business  Law  and  Legal  Forms. 


BUSINESS 
ADMINISTRATION 

THEORY,  PRACTICE  AND  'APPLICATION 


Edit  0  r-In-  Ch  ief 

Walter  D.  Moody 

General   Managkk,   the    Chicago   AssoaATioN    of    Commerce, 
Author,  "Men  Who  Sell  Things." 

Managing  Editor 

Samuel  MacClixtock,  Ph.  D. 

Editorial  and  Educational  Directoir, 
La  Salle  Extension  UNiyEX£n.Y 


This  work  is  especially  designed  to  meet  the  practical  ez'ery-day  nfed^  of 
the  active  business  vum,  and  contains  the  fundamental  find  basic 
principles  upon  xvhich  a  successful  business  is  founded,  con- 
ducted and  maintained.     To  those  looking  [onvard  to 
a  business  lareer,  this  'icork  forms  the  basi< 
for  a  practical  and  systematic  course  tn 
"Business  Administration" 


published  by 
LA  SALLE  EXTENSION  UNIVERSITY 

CHICAGO 


n    Ik'-''' 


CopyrlKht,    1910, 
LASALLE    KXTENSION    UNU-ERSITY. 


INVESTMENTS  AND  SPECULATION 

^  This  treatise  has  been  especially  prepared  by  Louis 
Guenther,  Editor  New  York  Financial  World,  and 
presents  an  exhaustive  treatment  of  all  phases  of  in- 
vestments and  speculation  and  conveys  to  the  reader's 
mind  a  thorough  knowledge  of  each.  It  is  sup- 
plemented by  the  writings  of  well-known  financial 
experts,  capitalists  and  successful  operators.  Tt  is  a 
modern,  popular  and  authoritative  exposition  of  the 
principles  involved  in  investments,  the  science  of 
speculation,  buying  for  investments,  short  sales,  stock 
manipulation,  pyramiding,  bond  flotation,  analysis  of 
financial  statements,  etc.,  together  with  many  concrete 
examples  and  helpful  suggestions  for  the  guidance  of 
the  investor  and  those  engaged  in  business  transactions. 
It  is  also  arranged  to  serve  as  a  quick  reference  work, 
and  includes  a  complete  table  of  contents,  a  compre- 
hensive index  and  test  questions. 

W.\LTER  O.  Moody, 

Editor-in-Chief. 


248539 


INTRODUCTION  TO  BUSINESS  ADMINISTRATION. 

BY  WALTER  D.  MOODY. 

General  Manager,  The  Chicago  Association  of  Commerce. 
Author  of  '"Men  Who  Sell  Things." 

*'The  recipe  for  perpetual  ignorance   is:     Be  satisfied  zvith  your  own 
opinion  and  content  with  your  knotvledge." 

This  is  an  era  of  the  greatest  commercial  ac- 

Business  a  contest       tivity  the  world  has  ever  known.    The  devel- 

of  wits  opnicnt  of  business  is  one  of  the  marvels  of 

the  new  century.     A  few  years  ago  science, 

as  a  factor  in  commerce,  was  little  known  and  less  appreciated.     The 

amazing  advantages  to  business  of  intellectual  attainments  were  utterly 

without  recognition.     Today,  however,  business  has  become  a  contest  in 

which  the  quickest  perception  wins,  thus  transforming  the  counting  room 

into  a  battle  ground  upon  which  brain  matches  brain  for  supremacy  and 

success. 

Ah,  that  enchanting  word,  S-U-C-C-E-S-S.    It 
Success— educated       docs  not  require  a  magic  key  to  unlock  the 
enthusiasm  door  to  business  efficiency.     There  is  nothing 

mystic,  nothing  mysterious  in  the  applied 
method  of  the  really  resourceful  men  in  this  day  of  great  successes,  of 
marvelous  achievements  in  business  enterprise.  The  sum  total  is  con- 
tained in  two  words,  words  that  electrify,  nevertheless.  EDUCATED 
ENTHUSIASM. 

The  most  formidable  barrier  to  progress  has 

Changing  conditions     always  been  the  sfenseless  opposition  of  those 

make  to  whom  it  would  be  of  the  greatest  benefit. 

opportunities  Changing  conditions  are  the  order  of  the  day, 

for  enlightenment  has  worked  wonders.  In 
olden  times,  a  man  of  affairs  was  obliged  to  g^uard  liis  property  and  his 
loved  ones  by  building  a  moat  around  his  house  and  posting  sentinels  in 
and  around  his  estate.  The  time  is  not  long  past  when,  because  of  preju- 
dice, perversity  or  ignorance,  many  men  believed  that  opportunity  knocked 
only  once  at  any  man's  door.  Today,  thanks  to  deeper  insight,  most  men 
belicTc  that  life  itself  is  opportunity;  that  the  very  air  we  breathe  is 
opportunity ;  that  each  new  day  presents  broader  opportunities  for  accom- 


INTRODUCTION 

pHshinj]^  more  because  of  better  directed  energy.    Tliis  is  not   alone  the 
accepted  dof,'ma  of  the  man  who  is  making  his  way  in  the  world.    It  is 
tlie  creed,  doctrine,  tenet  or  religion,  whichever  you  may  care  to  term  it, 
of  the  great  captains  of  iiulnstr)'  everywhere. 

The  more  successful  the  man,  the  more  docs 
New  ideas  count        he  think,  study,  plan,  as  a  part  of  his  daily 

occupation  in  tiie  development  of  the  affairs  in 
which  he  is  interested.  Newer  and  better  ways  to  get  things  done  is  the 
business  standard  employed  today  by  successful  men  in  all  lines.  Only 
3'esterday  if  a  man  of  genius  advanced  a  new  idea,  he  found  himself 
ridiculed  and  his  innovation  opposed  on  all  sides  because  it  was  a  new 
idea.  Today,  it  is  different.  The  man  of  ideas  counts  in  the  trend  of 
affairs  as  he  has  never  counted  before. 

Everything  has  a  subjective  reason.    Progress 
Must  keep  step  with      is  acting  as  a  mighty  dynamic  force  in  chang- 
changing  times  ing  men's  viewpoint  of  life  and  things.     Sup- 

pose the  stroke  oar  on  a  varsity  crew,  while  in 
a  race  against  an  opposing  crew  from  a  competitive  institution,  should 
suddenly  stop  rowing  in  harmony  with  his  associates  and  begin  to  row 
backwards — that  crew  would  not  get  very  far  without  trouble.  Suppose 
a  lawn  mower  should  be  reversed  and  forced  to  run  backwards — there 
would  not  be  much  progress  made  in  cutting  grass  on  that  lawn.  Varsity 
crews  and  lawn  mowers  must  move  forward.  Business  men  must  ad- 
vance with  the  times. 

A  great  merchant  in  Chicago  tells  a  good  story  of  his  youth.  lie  was 
a  member  of  a  state  regiment  of  militia.  On  a  certain  occasion,  his  com- 
pany was  sent  out  on  dress  parade.  An  old  maiden  aunt,  with  consider- 
able colonial  blood  in  her  veins,  took  much  pride  in  her  nephew  and  his 
company.  While  reviewing  the  parade,  she  was  suddenly  heard  to  ex- 
claim: "Why,  every  single  man  in  that  company  is  out  of  step  excepting 
my  nephew."  Most  men  who  fail  to  get  on  in  the  world  do  not  realize 
that  success  lies  in  keeping  step — in  making  progress  with  changing  condi- 
tions. They  generally  make  the  mistake  of  thinking  that  the  world  and 
everything  in  it  is  out  of  harmony  with  themselves. 

A  business  man  of  successful  experience  rea- 

New  ideas  worth         lizes  that  ideas — newer  and  better  principles  of 

searching    for  conducting  business — are  of  the  greatest  value, 

and  he  also  knows  that  it  pays  him  to  search 
for  them.  The  same  old  way  of  doing  things  cannot  longer  be  success- 
fully employed  month  after  month  and  year  after  year  as  under  the  old 
regime.  The  business  man  must  be  modern,  up-to-date.  The  physician 
or  lawyer  finds  that  to  compete  successfully  he  is  compelled  to  search 


INTRODUCTION 

without  ceasing  in  order  that  he  may  comprehend  the  advancement  in 
treatments  or  procedures.     "To  the  man  wlio  fails  belong  the  excuses." 

President  James,  of  the  University  of  Illinois, 

Demand  for  trained      was  asked  if  there  was  any  demand  from  busi- 

men  ness  houses  for  college-bred  men.     His  reply 

was :  "The  demand  has  been  far  in  excess  of 
the  supply  since  courses  in  business  administration  were  established  in 
our  institution  seven  years  ago.  Each  year  has  brought  many  more 
requests  than  we  have  men  to  recommend."  Ten  years  ago  President 
James  would  have  been  ridiculed  for  advancing  this  new  idea  for  the 
establishment  of  a  school  of  commerce  in  connection  with  a  university. 
Today,  commercial  schools  are  a  part  of  the  regularly  established  courses 
of  nearly  all  of  the  great  universities  of  our  country.  Men  trained  in  the 
theory,  practice  and  administration  of  business  will  always  occupy  the 
best  positions  and  will  always  command  the  greatest  salaries. 

All  men  fail  at  times  in  the  accomplishment  of 

Value  of  new  ideas       satisfactory  results  in  the  various  enterprises 

in  in  which  they  are  engaged,  without  being  able 

business   emergencies    to  give  an  explanation.     The  principles  that 

have  been  applied  successfully  for  many 
years  seem  apparently  to  have  counted  for  nothing.  It  is  frequently  evi- 
dent that  in  such  cases  a  very  insignificant  thing,  a  mere  oversight  per- 
chance, has  been  the  direct  cause  of  the  failure.  To  be  able  to  put  the 
finger  on  the  precise  cause  of  the  lack  of  success  in  one's  method  would 
locate  the  cause  of  the  disaster.  Then  it  is  that  a  real  appreciation  of 
new  ideas  is  fully  realized. 

Failure  is  more  often  chargeable  to  a  refusa! 

Men  paid  for  what      to  learn  by  mistakes  how  to  avoid  them  than  it 

they  know — not  is    in    making   them.      Experience    is    a   good 

for   what    they    do       teacher,  but  who  can  deny  the  value  to  be 

gained  in  learning  from  the  experience  of 
others,  for  we  cannot  all  have  the  same  experience  or  the  same  view  of 
similar  experiences.  There  are  many  pathways  to  success,  but  the  road 
of  in(?lvidual  experience  is  narrow  and  rugged.  It  is  a  commonly  ac- 
cepted fact  that  for  every  ten  dollars  a  high-salaried  man  draws,  he  re- 
ceives nine  dollars  for  what  he  knows  and  one  dollar  for  what  he  does. 
On  the  same  basis  the  successful  business  man,  employing  a  large  force 
of  other  men,  realizes  that  his  own  greatest  worth,  as  applied  to  his 
affairs,  lies  not  so  much  in  what  he  can  do  himself  as  how  much  he  can 
encourage  his  employees  to  do.  In  either  case,  his  own  personal  knowl- 
edge is  the  power  behind  the  throne. 


INTRODUCTION 

The  man  who  would  secure  the  largest  net  re- 
Knowledge  in  excess    turn  from  his  individual  effort  in  the  field  of 
of  present   needs         endeavor,  and  he  who  would  realize  the  great- 
rccessary  est  possible  advantage   from  the  efforts     of 

those  under  his  command  must,  of  necessity, 
possess  knowledge — indispensable  perception  far  in  excess  of  the  needs  of 
the  moment.  Discernment,  like  a  bank  account,  soon  runs  out  if  it  is 
overdrawn  or  if  it  is  not  continually  replenished.  In  business  the  "check- 
ing system"  of  knowledge  is  the  sort  of  account  that  pays  best — not 
the  "savings  account  system."  Knowledge  that  is  simply  corked  up  and 
allowed  to  accumulate  cobwebs  and  rust  can  avail  nothing.  The  sharpest 
vinegar  is  procured  by  constantly  replenishing  the  old  stock  with  new. 

Reliable  statistics  prove  that  only  about  ten 

90%  failures  per  cent  of  all  people  who  engage  in  business 

vs.  are   successful    and   make   money;   the  other 

lO/o    moneymakers      ninety  per  cent  become     insolvent     and   fail. 

That  is,  they  do  not  actually  encounter  the 
sheriff,  or  go  into  the  hands  of  a  receiver,  but  they  fail  nevertheless  to 
succeed  in  the  sense  of  making  money,  and  what  other  possible  reason 
can  anyone  have  for  engaging  in  business  if  not  to  accumulate  money? 

Why  do  so  many  fail?     Ask  any  credit  man 
Failures  due  to  lack       and  he  will  tell  you  that  it  is  not  because  of 
of  intellectual  the  lack  of  capital,  or  other  material  resources, 

capacity  but  it  is  due  primarily  to  a  lack  of  intellectual 

capacity,  the  sort  of  brains  that  dig  and  work 
and  sweat  until  they  find  a  way  to  accomplish  things ;  brains  that  go  to 
the  bottom  of  things ;  brains  that  are  always  looking  for  better  results ; 
brains  that  never  abandon  a  problem  until  they  have  found  a  way  to 
solve  it.  A  friend  once  told  me  that  he  inquired  of  the  manager  of  a 
house  employing  some  throe  hundred  traveling  men  how  many  salesmen 
they  had.  The  manager  replied,  "Three."  My  friend  asked,  "How's 
that?  I  am  told  your  force  of  traveling  men  numbers  nearly  three  hun- 
dred." "Ah,  that  is  quite  different,"  replied  the  manager;  "we  have  two 
hundred  and  ninety-seven  traveling  men.  but  only  three  salesmen." 
Quite  likely  that  manager's  estimate  was  intended  to  be  taken  figuratively 
rather  than  literally.but  it  serves  to  illustrate  the  fact  that  in  this  great 
United  States  there  are  millions  of  men,  young,  middle-aged  and  old,  who 
are  content  to  plod  along  in  a  mediocre  sort  of  way,  heedless  or  unmindful 
of  the  fact  that  opportunity,  knowlcdcre.  possibilities,  are  calling,  calling, 
calling  to  them  to  come  up  higher.  There  are  hundreds  of  thousands  of 
other  men  engaged  in  business  who  sit  idly  bv  while  their  trade,  like  the 


INTRODUCTION 

sands  in  the  hour  glass,  slowly  ebbs  away,  and  eventually  is  absorbed  by 
their  more  progressive  business  neighbors. 

There  is  still  another  vast  army  of  business 
Moneymaking  and  men — salesmen,  clerks  and  wage-earners  of  all 
business    literature       classes — who  are  beginning  to  catch  a  glimpse 

of  the  dawning  of  a  new  business  era,  the 
greatest  the  world  has  ever  known,  an  era  impregnated  with  possibilities 
and  opportunities  for  those  who  are  ready  with  wicks  trimmed  and  oil 
in  their  lamps.  To  the  earnest  latter  class  which  is  really  desirous  of 
profiting  by  the  experience  of  others,  there  is  no  need  of  elaborating  the 
possibilities  embodied  in  this  course  of  reading  in  Business  Administra- 
tion. This  set  of  books,  containing  valuable  business  data  on  many  sub- 
jects, thousands  of  pages  telling  the  story  of  success  illustrated  by  trained 
men  wdiose  names  are  respected  everywhere,  is  intended  to  reach  all 
classes.  There  is  absolutely  nothing  in  print  that  can  even  approach  or 
can  begin  to  compare  with  it  in  value  as  a  reference  library  for  business 
men  or  excel  it  as  a  complete  course  of  instruction  for  any  man  desirous 
of  making  the  best  of  his  possibilities  and  opportunities  in  the  kaleido- 
scopic age  through  which  the  business  world  is  now  moving. 

The  more  practical  the  ideas,  the  better  the 
Practical  ideas  best  basis  for  good  work.  Not  long  since,  busi- 
ness men  generally  pooh-poohed  the  idea  of 
employing  in  the  conduct  of  their  business  anything  new,  which  was  taken 
from  the  writings  and  experience  of  others,  such  as  is  contained  in  this 
remarkable  series,  contributed  to  by  some  of  the  brightest  minds  in  the 
business  world  today.  There  is,  however,  in  these  days  unmistakably  a 
hungering  and  thirsting  for  just  this  new  sort  of  literature.  It  fills  a  long- 
felt  need — fills  it  exactly,  completely,  satisfactorily.  Being  the  author  of  a 
work  on  salesmanship  which  has  had  a  countrywide  circulation,  I  have 
been  literally  besieged  by  business  men  everwhere  asking  me  to  recom- 
mend books  treating  of  successful  business  methods,  and  have  been  cha- 
grined to  find  how  limited  was  the  supply.  The  man  who  formerly  was 
prejudiced  against  such  sources  of  information  must  now  step  aside 
and  make  way  for  progress  or  unite  with  the  popular  demand  for  more 
education  and  better  methods. 

Show  me  the  man  who  says  he  has  no  pa- 

Cannot    afford  tience  for  such  things,  and  I  will  show  you  a 

vs.  man,  like  the  stroke  oar  and  the  lawn  mower, 

can   afford  who  does  not  believe  in  moving   forward  in 

progress.  Show  me  the  man  who  says  he  has 
no  time  to  read  of  new  methods  and  principles,  and  I  will  show  you  the 
one  who  utterly  fails  to  perceive  that  familiarity  with  business  literature 
of  this  kind  means  pecuniary  advancement.    Show  me  the  man  who  says 


INTRODUCTION 

he  cannot  afford  to  invest  in  such  a  set  of  books,  and  I  will  show  you 
one  who  apparently  CAN  afford  to  waste  his  energy  in  misdirected 
effort — that  energy  and  effort  which  are  to  every  wage-earner  and 
tradesman  both  his  stock  in  trade  and  his  invested  capital. 

Someone  has  said,  "There  are  three  kinds  of 

Failures  people  in  the  world — the  Can'ts,  the  Won'ts 

unnecessary  and  the  Wills,     The  first  fail  at  everything; 

the  second  oppose  everything;  the  third  suc- 
ceed at  everything-."  I  would  add  a  fourth  kind — the  largest  class  of  all 
>— the  Don't  Trys,  the  "Oh-what's-the-use/'  "It-doesn't-interest-me"  sort 
of  people.  Their  name  is  legion  ;  their  fault  is  lack  of  confidence.  Knowl- 
edge is  the  greatest  inspiration  of  confidence  to  be  found  on  earth.  You 
may  not  personally  be  held  in  the  hope-paralyzing  bontlage  that  produces 
the  "Oh-what's-thc-use,"  or  "I'm-not-interested"  germ,  but  if  you  are  not, 
you  are  exceptional.  Most  people  are,  and  that  is  the  reason  that  such 
\>ersons  are  just  about  what  luck,  good  fortune  or  chance  make  them, 
succeeding  if  fortune  favors  them,  failing  if  they  are  left  to  depend  upon 
their  own  resources.    Result :     Nine  fail  where  one  succeeds. 

It  is  very  fortunate,  indeed,  for  most  men  that  so  much  of  their  happi- 
ness depends  upon  success.  There  is  nothing  on  earth  quite  so  terrible 
to  think  of  as  failure,  especially  that  due  to  lack  of  effort,  unless  possibly  it 
be  the  failure  of  a  man  who  lacks  the  courage  or  initiative  to  try  to  make 
the  most  of  himself,  and  thus  lets  his  best  opportunities  escape  him.  And 
this  last  is  really  the  most  pitiful  thing  that  can  befall  a  man.  It  is  well 
enough  to  plan  opportunities,  but  if  we  had  the  wisdom  to  take  advantage 
of  such  opportunities  as  naturally  come  to  us,  results  would  more  often  be 
found  in  the  balance  on  the  right  side  of  the  ledger.  And  so  I  am  of  the 
opinion  that  a  clear  explanation  of  why  a  very  large  class  of  people  do  not 
succeed  is  found  in  some  of  these  expressions — "I  don't  care,"  "I  can't," 
"It  doesn't  interest  me/'  or  "Oh,  what's  the  use." 

One  of  the  great  objects  set   forth     in  this 

Basis    of   all    busi-       Business  Administration  series  is  to  supply  the 
ness  success  positive  energy  which  begets  courage,  confi- 

dence, initiative  and  success.  We  want  to 
make  you  feel  the  necessity  of  doing  some  reading,  a  little  plain  think- 
ing, and  to  make  as  clear  as  possible  the  important  things  that  arc  in- 
volved in  the  serious  but  very  fine  game  of  business. 

With  business  becoming  with  each  succeeding  day  more  and  more  of 
a  science,  it  is  high  time  to  understand  what  is  essential  to  it.  Speaking 
of  the  subject  of  "Organized  Business,"  a  great  authority  recently  said, 
"It  is  time  even  for  business  men  to  understand  business."  Again,  the 
purpose  of  this  course  in  Business  Aflministration  is,  if  possible,  to  meas- 
u:  c  the  power  and  principles  of  business,  to  trace  their  ramifications,  de- 


INTRODUCTION 

fine  their  elements,  get  hold  of  their  vital  fundamentals,  and  so  compre- 
hend them,  both  in  technical  detail  and  as  a  mighty  unit.  And  I  am  confi- 
dent we  have  done  all  this.  I  find  that  at  the  foundation,  the  machinery 
of  business  is  simple,  but  whether  it  is  plain  or  complicated,  all  who  would 
succeed  must  make  every  effort  to  comprehend  it  thoroughly.  All  I 
care  to  emphasize  at  present  is  the  great  truth  that  knowledge,  estab- 
lished and  classified,  is  the  basis  of  all  business  success.  This  is  clearly 
established  in  this  course  of  reading,  and  I  am  trying  to  incite  your 
imagination  in  writing  of  its  merits  just  as  I  would  endeavor  to  enable 
you  to  realize  it  if  I  could  talk  to  you  personally  right  across  my  desk. 
The  observant  man  can  see  clearly  the  things  I  am  talking  about,  but  to 
most  men  the  mind's  eye  perceives  not  by  observation,  but  only  when  the 
imagination  is  stimulated.  So  I  would  stir  all  men  to  look  earnestly  into 
these  things,  with  a  view  to  their  personal  betterment. 

Business  is  far  more  than  business  as  it  is  corn- 
Business  axioms         monly  understood.     It  is  a  science,  and  it  is 
simple   to  the  eager,  practical  minds  of  business  men  that 

understand  we  shall   endeavor  to  convince  first  of  that 

fact,  and  our  reasons  for  addressing  those 
principally  concern,ed  are  especially  good.  Why?  I  have  found  that  in 
writing  about  business  whenever  I  was  able  to  make  the  principles  so 
plain  that  business  men  understood  them,  everybody  else  did,  so  it  is  to 
be  expected  that  if  business  axioms  can  be  made  simple  enough  for  busi- 
ness men  to  understand  them,  everyone  will  apprehend  them.  Every- 
body.   And  it  is  everybody  that  we  are  attempting  to  reach. 

For  nearly  thirty  centuries  men  have  recog- 

Knowledge  is  nized  the  concrete  wisdom  of  Solomon's  prov- 

power  erb:     "A  wise  man  is  strong;  yea,  a  man  of 

knowledge  increaseth  in  strength."  Yet  we 
have  been  slow  in  making  its  application  imiversal  to  the  race.  But  we 
are  beginning  to  understand  that  the  power  inherent  in  knowledge  applies 
as  well  to  commercial  and  industrial  as  to  scholastic,  political  and  social 
life,  as  well  to  the  counting  room  as  to  the  pulpit,  as  well  to  the  shop  as 
to  the  university,  as  well  to  the  farm  as  to  the  bar.  Knowledge  is  power 
and  is  the  only  source  of  real  intellectual  sovereignty  that  the  Creator  has 
ever  entrusted  to  men. 

In  conclusion.  I  would  say  that  these  words  are  addressed  to  the 
business  men  of  America,  and  this  designation  includes  the  banker  and 
his  clerks,  the  farmer  and  his  sons,  the  lawyer  and  the  law  student,  the 
financier  and  the  man  who  sells  bonds  and  stocks,  the  merchant  and  his 
clerk,  the  accountant  and  the  bookkeeper,  tlie  manager  and  his  assist- 
ants— the  ambitious  young  men  of  the  Twentieth  Century  type,  contem- 
plating the  pursuit  of  any  business,  trade  or  occupation. 


CONTENTS 


INVESTMENTS  AND  SPECULATION. 


PART  I. 


PACE 


Investments  and  Speculation. 
By  Louis  Guenther  . 


Introduction — 

I.  Defining   Investment  .\nd   Speculation — 

II.  The  Intelligent  Employment  of  Capital — 

III.  The  Earliest  Investment — 

IV.  How  Farm  Mortgages  are  Placed — 
V.  The  Influence  of  Loans  on  Money — 

VI.  City  Real  Estate  Compared  with  Farm  Lands 

VII.  Land  and  Real  Estate  Booms — 

VIII.  The  Multiplicity  and  Complexity  of  Bonds — 

IX.  Govern.ment,  St.^te  and  Municip.\l  Bonds — 

X.  The  A.MAZING  Variety  of  Railroad  Bonds — 

XI.  Public  Service  Bonds — 

XII.  Other  Bonds — 

XIII.  Irrigation  Bonds — 

XIV.  Bonds  in  Mining  Enterprises — 
XV.  Ti.MBER  Bonds — 

XVI.  Guaranteed  Stocks — 

XVII.  Amortiz.jltion  and  Sinking  Funds — 

XVIII.  Bonds  for  Women  and  Estates — 

XIX.  The  Market  for  Bonds — 

XX.  The  Character  of  an  Enterprise — 

XXI.  Science  of  Specul.\tion — 

XXII.  Efforts  to  Prevent  Speculation — 

XXIII.  The  Mystery  of  a  Balance  Sheet — 

X.XIV.  The  Function  of  Exchanges — 

XXV.  Methods  of  Trading  in  Stocks — 

XX\'I.  Methods  of  Trading  in  Stocks  (Continued) — 

XXVII.  Operations  on  Other  Exchanges — 

XXVIII.  Panics— 

XXIX.  Pools  and  Manipulation — 

XXX.  The  Promoter's  Place  in  Finance — 

XX.XI.  The  Get-Rich-Quick  Lure — 


1 
3 

7 
13 
16 
19 

22 

30 

38 

46 

54 

63 

72 

81 

87 

90 

92 

95 

97 

99 

101 

109 

119 

128 

13R 

146 

154 

16.1 

172 

179 

188 

198 


PART  II. 

General  Principles  of  Investment. 

By  George  Garr  Henry 207 

Safety  and  Security. 

By  John  Moody   216 

The  Obligation  of  the  Investment  Banker  to  his  Clients. 

By  Allen  G.  Hoyt 231 

The  Study  of  Fundamentals  and  their  Bearing  on  Security  Prices. 

By  Thomas  Gibsox  236 


CONTENTS 

FACE 

Market  Movements  of  Securities. 

By  Geokgi;  (]akr  I1i:nrv 250 

Stocks  and  their  Features — A  Division  and  Classification. 

Hy  John  Adams.  Jr 258 

Stock  Markets  and  Exchanges 281 

Classification  of  Bonds. 

By  Frederick  Lowmiai  tt  312 

Growinjj  Popularity  of  Public  Service  Corporation  Bonds  as  Investment. 
By  Thomas  \V.  Simmons 332 

Forecasting^  Trade  Conditions  bv  the  Area  Theory. 

By  Roc.ER  W.  Babson   .  .' '. 344 

Wall  Street  Phrases  and  Methods. 

P,y  John   Moody   370 

Quiz   Questions    381 


INVESTMENTS  AND  SPECULATION. 

BY  LOUIS  GUENTHER. 

(Born  London,  England,  1874;  son  of  Utto  Guenther  and  Rosa  Guenther; 
came  to  United  States  at  age  of  three  years;  attended  Public  Schools  of  Milwaukee, 
St.  Louis  and  Chicago;  showed  inclination  for  Journalism,  publishing  during  his 
school  days  two  different  papers,  one  of  which  proved  quite  a  success  as  a  weekly; 
after  leaving  school  entered  into  the  general  advertising  agency  business  as  a 
solicitor;  branched  out  as  publisher,  establishing  in  1S96  the  .Mail  Order  Journal; 
in  1903,  started  The  Financial  World  in  New  York  to  discuss  investments  in  a 
manner  that  could  be  readily  understood  by  the  masses,  resulting  in  estab- 
lishing a  financial  journal  which  l.as  gained  widespread  circulation  and  in- 
fluence] 

PART  I. 

INTRODUCTION. 

Every  head  of  a  corporation,  every  business  man,  in 
fact  everyone  employed  in  a  responsible  position  and  upon 
whose  judgment  the  success  of  an  enterprise  largely  de- 
pends, should  provide  himself  with  a  general  knowledge 
of  the  problem  of  investments  and  speculation. 

Investment  and  speculation  are  so  closely  associated 
with  the  well-being  of  trade  that  the  two  are  inseparable. 
Figui'atively  speaking  they  are  the  propelling  forces  gov- 
erning the  money  market,  which  in  turn  is  the  vital  life- 
blood  of  business.  This  is  an  indisputa])le  fact.  It  cannot 
ho  denied. 

Many  a  UK^rchant  and  many  a  manufacturer  who  has 
mastered  the  problem  of  investment  and  s]ieculation  has 
been  able  to  put  his  knowledge  to  great  financial  advantage 
in  his  ability  to  foresee  a  di-ain  upon  the  money  market  and 
its  consequent  effect  upon  interest  rates  by  providing  for 
all  his  banking  accommodations  long  l^efore  interest  rates 
have  hardened. 

So,  also,  have  they  been  able  by  anticipating  a  dcjires- 
sion  in  trade  to  curtail  expenditures  and  guard  their  credit 
accoimts  from  weakness.  Such  a  knowledge  prevents  them 
from  being  caught  off  their  guard  l)y  a  sudden  dropping  off 

B.VII— I  I 


2  LOUIS  GUENTHER 

in  business.  And,  vice  versa,  tlicy  are  in  a  position  to  detect 
a  revival  in  trade  l)y  the  same  Inironieter,  the  money 
market. 

As  it  is  also  tnio  that  business,  whatever  may  be  its 
nature,  is  a  calling,  i)urely  confined  to  the  makinu:  of  })rofits 
sometime  or  other,  surplus  funds  are  accunudated  whieh  are 
intended  for  investment.  The  intelligent  and  safe  invest- 
ment of  such  idle  funds  requires  a  general  knowledge  of 
investment  and  speculation.  Fortified  with  such  knowl- 
edge the  owner  of  surplus  funds  guards  himself  from  se- 
rious errors.  It  inculcates  in  him  the  absolute  importance 
of  being  guided  by  actual  facts  and  not  by  hearsay  advice 
of  others.  It  can  harm  no  one  to  know  how  to  differentiate 
between  investments  and  speculation;  it  can  only  benefit 
him. 

The  author  of  Investments  and  Speculation  in  tliis  series 
on  Business  Administration  has  taken  an  unusually  dry 
subject  and  handles  it  in  a  style  which  makes  it  interesting 
reading.  AMiile  not  a  text  book  in  any  sense  of  the  word 
it  still  exhaustively  covers  Investments  and  Speculation 
and  its  different  phases  so  that  it  conveys  directly  to  the 
reader's  mind  a  thorough  knowledge  of  the  fundamentals 
of  each.  Not  only  will  tliis  l)ook  prove  a  great  lu^lp  t(»  all 
business  men  but  e(|ually  instructive  to  any  who  have 
an  ambition  to  enter  the  banking  or  ])rokerage  business. 

This  reference  book  presents  an  exhaustive  treatment 
of  all  phases  of  Investments  and  Speculation,  furnishing 
the  thoughtful  reader  with  reliable  information  for  guid- 
ance in  business  transactions.  * 


I.  DEFINING  INVESTMENT  AND  SPECULATION. 

Dofiiiing  the  difference  between  investments  and  specu- 
lation will  not  prove  an  easy  task,  as  there  are  no  fast  and 
set  rules  to  distinouish  the  one  from  the  other. 

Tlie  lexicographers  commonly  describe  the  word  invest- 
ment as  follows:  ''To  lay  out  capital  in  the  purchase  of 
property  for  pennanent  use  as  opposed  to  speculation." 

And  then  they  state  that  speculation  is:  "To  make  a 
purchase  or  investment  that  involves  risk  in  the  hope  of 
probable  gain";  again,  "As  a  more  or  less  risky  investment 
of  money  in  expectation  of  considerable  gain." 

It  is  plain  to  see  that  in  each  case  the  word  means  the 
employment  of  capital  for  gain.  Broadly  speaking  there 
is  no  distinction  between  the  two  methods  of  laying  out 
capital,  beyond  that  made  in  the  public  mind  by  the  meas- 
ure of  risk  involved.  In  human  experience  it  has  often 
turned  out  that  such  measure  of  risk  has  so  changed,  from 
what  seemed,  on  the  yesterday,  to  have  been  surrounded 
by  all  the  safeguards  against  loss,  as  to  embrace  all  the  ele- 
ments of  hazard  on  the  morrow. 

This  may  appear  rather  a  strange  statement.  Still  it  is 
an  indisputable  truth.  A  simple  example  will  easily  estab- 
lish it:  For  instance,  there  is  no  safer  investment  in  the 
mind  of  the  public  than  a  government  bond;  at  least  so  far 
as  our  own  government  ])onds  are  concerned.  Suppose,  how- 
ever, a  government  was  conquered  and  its  possessions  in- 
vaded by  the  forces  of  a  foreign  foe,  what  would  be  the 
natural  outcome  of  such  a  disaster?  The  securities  issued 
by  the  stricken  nation  would  rapidly  decline  in  value, 
through  the  apprehension  aroused  among  investors  over 
the  uncertaintv  as  to  how  the  invaders  would  deal  with 
the  nation's  creditors.    They  could,  if  they  so  desired,  wipe 

9 


4  LOUIS  GUENTHER 

the  slate  cloan  of  all  debts,  or  they  eould  ediiipromise  or 
thcv  could  ])ay  in  full.  Yet,  as  long  as  it  is  not  known  just 
what  the  outeonic  would  be,  the  quotations  of  all  the  na- 
tion's ()l)li.irations  would  Huctuate  violently.  As  securities, 
in  reirard  to  the  sai'ft\'  of  the  funds  invested  in  thcni,  tliev 
could  not  properly  l)e  classilied  as  investments. 

Of  course,  such  a  turr  of  affairs  with  us  is  a  remote 
contingeney.  I  mention  it  as  an  extreme  possibility,  mere- 
ly to  emphasize  my  statement  that  there  are  really  no  im- 
nnitable  rules  which  will  make  an  investment  an  everlast- 
ing investment.  Often,  unforeseen  events  will  reverse  an 
investment  into  a  speculation  or  change  what  at  one  time 
appeai'od  a  I'isky  speculation  t(^  a  veiy  desirable  invest- 
ment. 

It  was  not  very  long  ago,  measured  in  years,  when  our 
govennnent  bonds  were  looked  upon  by  foreign  investors 
as  more  or  less  a  speculation.  This  was  dui'ing  the  dark 
days  of  our  Civil  War,  when  it  seemed  as  if  (Jladstone,  the 
British  Premier,  spoke  the  truth  when  he  declared  a  new 
nation  was  born  by  the  secession  of  the  Southern  States  from 
the  United  States  of  America.  The  bonds  then  issued 
by  our  Government  to  raise  money  to  carry  on  the  war  were 
viewed  with  sus})icion  in  England.  Only  the  Cerman  and 
French  investors  took  kindly  to  our  securities  and  then 
only  after  they  were  obtainable  at  bargain-counter  terms. 

Nor  does  a  clash  in  arms  between  nations  always  tend  to 
have  a  serious  effect  upon  their  securities.  It  sometimes  hap- 
pens that  economic  influences  depress  their  values  to  such 
a  degree  as  to  make  them  a  poor  investment  for  those  who 
placed  their  money  in  them  when  they  were  regarded  as 
gilt-edged  securities  and  were  bringing  high  prices.  This 
is  what  has  happened  with  British  consols,  as  the  govern- 
ment obligations  of  the  English  nation  are  called.  They 
have  steadily  declined  in  price  until  this  year  they  have 
fallen  to  the  lowest  price  in  nearly  eighty  years.  I  shall 
not  here  enter  into  a  discussion  of  the  causes  responsible  for 


•INVESTMENTS  AND  SPECULATION  5 

this  abnoiToal  decline  in  one  of  the  premier  securities  of 
the  entire  world.  I  cite  it  only  as  another  illustration  in 
support  of  my  contention  that  the  dividing  line  between  in- 
vestment and  speculation  is  very  elastic. 

What  may  be  good  today,  may  be  worth  much  less  to- 
morrow or  even  worthless. 

A  mortgage  upon  a  building  or  a  parcel  of  land  may  be 
a  very  desirable  investment.  An  upheavel  of  nature's 
forces  may  occur  on  the  spot  where  the  pledged  land  is 
located  and  destroy  all  the  value  in  less  time  than  it  takes 
to  write  this  paragra]">h.  Did  this  not  happen  in  Pompeii? 
Can  it  not  happen  again?  The  ashes  of  Vesuvius  in  a  few 
hours  swept  into  total  destruction  all  the  capital  permanent- 
ly laid  out  in  homes  and  in  other  structures  of  the  doomed 
city.  An  earthquake  attacked  Messina  only  a  year  or  two 
ago.  AVhile  Messina  was  not  completely  destroyed,  the  ca- 
tastrophe did  irretrievable  hami  to  capital  permanently  in- 
vested in  property.  And  that  capital,  in  the  light  of  sub- 
sequent events,  could  they  have  been  foreseen,  could  not 
be  properly  classified  as  being  invested,  since  it  was  at 
all  times  subjected  to  extraordinary  risks,  risks  such  as  are 
grouped  under  the  term  ''speculation,"  as  commonly  un- 
derstood. 

Men  make  values,  not  conditions;  these  they  merely  as- 
sist in  making.  As  long  as  values  are  thus  made,  uncer- 
tainty, naturally,  will  surround  them.  If  the  human  race 
]^roferred  stones  as  money,  gold  then  would  have  no  value. 
AMiat  gives  gold  its  value  is  its  acceptance  as  a  common 
and  standai'd  medium  of  exchange.  Anyone  will  take  it  in 
retuni  for  some  commodity  or  article  he  wishes  to  sell.  It 
is  the  distinction  mankind  makes  between  the  degrees  of 
security  which  defines  the  division  between  investment  and 
speculation. 

The  foregoing  is  a  demonstrable  fact. 

It  is  popularly  supposed  that  a  bond  or  a  mortgage  is 
an  investment  because  there  is  pledged  to  secure  them 


6  LOUIS  GUENTHER 

some  physical  i)r()pL'rl\'.  However,  tins  is  uot  always  the 
case.  The  property  securing  a  bond  may  ho  worth  all  that 
it  is  represented  for  the  purposes  for  which  it  is  pledged, 
but,  should  it  be  employed  for  other  uses,  might  not  realize 
anywhere  near  the  sum  represented  ))y  the  bonds.  So  also 
with  a  mortgage. 

There  are  bridges  on  some  of  our  principal  railroad  sys- 
tems that  were  built  with  the  money  raised  from  the  sale 
of  bonds.  As  long  as  tlie  railroads  use  these  bridges  and 
pay  rental  for -their  use,  these  bridge  bonds  are  desiralde 
investments,  but,  should  the  railroads  abandon  them,  from 
where  would  the  interest  for  the  bonds  come?  The  prop- 
erty, as  old  iron  and  steel,  would  never  realize  the  capital 
invested  in  them.  So  might  be  the  case  with  a  mortgage 
on  a  water  power  plant.  Tf  the  water  sup]>ly  should  be- 
come exhausted  there  would  be  no  need  for  the  power  i>lant 
and  its  machinery  and  the  essential  security  which  had 
made  the  mortgage  a  good  investment  would  pass  with 
the  passing  of  the  water. 

Investment  of  money  is,  therefore,  wholly  a  ]iroblem  of 
human  judgment  insofar  as  safeguarding  it  against  what 
are  commonly  assumed  to  be  extreme  risks.  In  fact,  it  is  in 
a  sense  a  security  which  human  judgment  aims  to  keep 
free  from  all  hazard  as  far  as  it  can  make  tliis  jtossible.  It 
is  taken  for  granted  from  the  very  begiuuiug  that  specu- 
lation involves  taking  chances  for  extraordinary  gains. 


n.    THE  INTELLIGENT  EMPLOYMENT  OF 

CiiPITAL. 

It  is  best,  under  the  circumstances,  to  eliminate  from 
consideration  all  hazards  to  investments  caused  by  the 
caprices  of  unforeseen  forces  and  conditions  which  human 
judgment  and  foresight  are  powerless  to  control. 

As  much  as  they  may  interfere  with  the  intelligent  em- 
ployment of  capital,  so  likewise  is  their  effect  on  the  dura- 
tion of  human  life. 

It  is  as  possible  for  a  parent  to  feel  certain  beforehand 
that  his  new  born  offspring  will  reach  the  scriptural  age 
of  three  score  and  ten,  as  it  is  for  an  investor,  no  matter 
how  careful  he  is  in  his  selection,  to  positively  assume  the 
absolute  safety  of  the  capital  he  has  laid  out  in  a  given 
security. 

However,  we  do  know,  in  determining  the  length  of  hu- 
man life,  the  average  age  reached  when  the  simple  rules 
of  health  are  carefully  followed,  and  no  fatality,  whether 
from  accident  or  disease,  intervenes  to  cut  it  short. 

So  is  it  also  the  case  with  investments.  Bv  observing 
the  ordinary  precautions  they  can  be  safeguarded  against 
almost  every  contingency  except  unknown  eventualities. 

Large  investors  even  go  so  far  as  to  protect  themselves 
against  unexpected  surprises.  They  diversify  their  in- 
vestments. That  is,  they  distril)ute  their  capital  among 
different  securities. 

On  a  principle  somewhat  similar  to  this,  the  life  insur- 
ance business  is  based.  Instead  of  selecting  their  risks, 
life  insurance  actuaries  have  successfully  worked  out  a 
standard  mortality  table.  This  table  is  wonderful  for  the 
degi'ee  of  its  accuracy  in  determining  the  average  death 
rate.    Bv  means  of  this  mortalitv  table  life  insurance  com- 

7 


8  LOUIS  GUENTHER 

panics  can  tell  almost  to  the  exact  tipfure,  the  number  of 
people  out  of  every  thousand  who  will  die  each  year. 

Underlying  their  mortality  table  is  one  broad  law,  which 
is  that  each  person,  before  being  insured,  must  be  physi- 
cally free  from  all  traces  of  disease  which  can  tenninate 
fatally.  Still  this  is  but  the  law  of  averages,  only  by  an- 
other name.  Alth<nigh  not  recognized  very  many  years, 
not  over  seventv-five  vears  at  the  most,  this  law  has  more 
than  justified  itself  as  a  reliable  measure  of  safety,  and  tlie 
proof  is  the  enormous  assets  the  life  insurance  companies 
have  accumulated.  Collectively,  their  assets  mount  up  into 
the  billions  of  dollars.  They  represent  the  funds  that  are 
the  l)ulwarks  of  protection  for  outstanding  policies  of  be- 
tween ten  and  fifteen  times  as  much. 

In  a  similar  manner  are  fire,  marine  and  other  lines  of 
insurance  operated.  All  their  premiums  are  based  on  dif- 
ferent average  tables.  Moreover,  the  same  principle  is  now 
a]»j)lied,  more  or  less,  to  investments.  That  is,  our  large 
banks  and  institutions  with  millions  in  capital  at  their  com- 
mand, divide  their  investments  among  different  classes  of 
securities  as  an  insurance  against  all  risk.  In  this  way, 
financial  loss  resulting  from  an  unforeseen  hazard  is  so  dis- 
tributed as  to  cause  verv  little  harm,  and  risk  is  reduced 
to  a  minimum. 

Even  different  states  have  enacted  laws  for  the  protection 
of  savings  bank  depositors,  laws  based  on  the  theory  of  av- 
erages. These  laws  govern  the  character  of  investments  in 
which  savings  banks  are  permitted  to  place  their  funds. 
Some  states  demand  of  a  railroad,  before  its  bonds  are  ac- 
ceptable as  an  investment  f(U*  savings  bank  deposits,  that 
it  has  paid  dividends  on  all  its  outstanding  stock  uninter- 
ruptedly for  a  certain  teiTn  of  years;  again  that  only  first 
mortgages  on  real  estate  can  be  considered  desirable  and 
safe  investments,  and  then  only  up  to  a  certain  amount  of 
the  property's  appraised  value.  Loans  to  depositors  are 
also  limited.     In  some  states,  loans  are  restricted  to  not 


INVESTMENTS  AND  SPECULATION  9 

more  than  10  per  cent  of  a  bank's  capital  to  any  one  cus- 
tomer of  the  bank.  Other  states  have  empowered  commis- 
sions for  the  purpose  of  supei-^asing  the  issuance  of  new 
securities  by  corporations  as  a  protection  against  inflation. 
Even  cities,  to\^Tis  and  counties  are  now  forced  by  statutes 
to  keep  their  bonded  ol)ligations  within  a  certain  percent- 
age of  the  assessed  value  of  their  taxable  property.  All 
these  precautionary  measures  are  adopted  for  the  protec- 
tion of  investors  and  as  a  check  against  reckless  banking. 
It  must  be  remembered  that  bankers  must  invest  their  de- 
posits and  make  loans  to  pay  interest  to  depositors. 

Often  you  will  read  in  the  descriptive  circular  regard- 
ing a  bond  that  it  is  a  legal  investment  for  banks  in  certain 
states.  This  means  that  the  corporation  Issuing  the  bond 
has  strictly  complied  with  the  laws  of  these  states. 

Investors  accept  the  fulfillment  of  the  requirements  of 
some  of  the  states  before  a  bond  becomes  a  legal  invest- 
ment for  their  chartered  banks  as  the  hallmark  of  a  high- 
class  security  in  much  the  same  confident  manner  as  they 
regard  the  "sterling"  mark  on  silver  ware  as  a  sign  of  its 
purity.  On  the  whole,  however,  investments  in  this  coun- 
try have  proved  miusually  satisfactory. 

AMiile  it  is  simply  impossible  to  estimate  ac- 
curately what  the  per  cent  of  losses  has  been  on 
investments  which  have  proved  disastrous,  neverthe- 
less it  may  be  taken  for  granted  that  when  laid 
side  by  side  witli  the  enormous  volume  of  capital  wliich 
has  been  invested  in  securities  in  this  country,  it  comes  to 
but  an  infiuitesimal  ])art  of  the  whole.  As  the  country 
grows  more  settled,  the  per  cent  of  loss  will  gradually 
lessen.  Such  is  the  characteristic  of  every  nation  as  it 
grows  older.  Take  p]ngland,  for  example;  also  France  and 
Holland;  Germany  and  Austria,  only  in  a  less  degree.  The 
resources  of  each  of  these  nations  have  been  so  scraped 
over  by  capital  in  its  search  for  opportunities  of  profitable 
employment,  that  they  no  longer  offer  the  investment  pos- 


10  LOUIS  GUENTHER 

sil)ilitios  they  once  did.  As  a  result,  the  majority  of  their 
government  and  muni('ii)al  u])ligati()ns,  their  raih-oad  se- 
curities and  their  hind  and  real  estate  mortgages,  command 
in  their  leading  financial  market  i)laces,  a  ])remium  which 
reduces  the  average  income  thev  vield  to  not  much  more 
than  3  per  cent  per  annum.  There  is  always  such  a  large 
demand  for  these  securities  that  they  are  scarce.  Ultra 
conservative  investors  prefer  them,  and  are  willing  to  fore- 
go a  part  of  the  income  which  is  obtainahle  from  securities 
of  lesser  safety  to  secure,  on  the  other  hand,  the  greater 
degree  of  safety  for  their  invested  capital. 

And  right  here  it  is  as  appropriate  as  anywhere  else  to 
explain  briefly  a  fundamental  law  governing  investments, 
as  well  as  speculations.  I  refer  to  the  economic  law  of  sup- 
ply and  demand  which  is  as  immutable  in  influencing  the 
prices  of  securities  as  it  is  in  deciding  the  price  of  all  our 
leading  commodities.  Artificial  manipulation  may  stay  the 
operatic »n  of  this  law  but  only  temporarily;  sooner  or  later 
it  will  express  itself.  The  i)anic  of  1907  is  the  latest  illus- 
tration of  the  innnutability  of  this  law  of  economics.  Se- 
curity prices  had  been  held  up  by  sheer  force  for  a  year 
previous,  against  the  lessening  availal)le  supply  of  cai)ital, 
only  to  finally  break  through  the  insecure  support  when 
all  artificial  means  had  exhausted  themselves. 

It  is  a  natural  sequence  for  investments  to  rise 
in  price  where  the  demand  for  them  outruns  the  avail- 
al)le  sui»])ly.  \"ice  versa,  it  is  true  that  their  jtrices  de- 
cline when  the  demand  is  small  and  investments  seeking 
buyers  glut  the  market.  It  is  this  rising  and  falling  in 
demand  and  su])])ly  which  causes  the  fluctuation  in  ])rices; 
not  oidy  ill  securities,  but  likewise  in  wheat,  cotton,  hay, 
barley,  oats  and  even  in  the  i>i-ecious  metals.  Even  gold, 
the  accej)ted  standard  for  coinage  among  all  th(^  ])rincii)al 
nations,  is  a  w  illiiig  sul)Ject  to  the  operations  of  this  law. 
Some  of  our  foremost  economists  contend  that  gold  in  re- 
cent years  has  been  mined  in  such  large  (piantities  as  to 


INVESTMENTS  AND  SPECULATION  11 

cause  the  higher  cost  of  livinq-,  and  eorrespondiiiG^ly  to  re- 
duce investors'  income. 

You  will  think  this  is  a  strange  theory.  You  will 
also  wonder  how  this  can  be  ix)ssible.  Still  their  conten- 
tion is  logicaL  The  more  gold  there  is,  the  greater  is  a  peo- 
ple's purchasing  power,  and  as  it  increases,  the  demand 
forces  prices  up.  On  the  other  hand,  however,  the  income 
on  a  secured  investment  is  fixed.  A  bond  or  a  mortgage 
may  have  been  purchased  some  years  ago  at  a  price  to  yield 
an  income  of  4  per  cent  annually,  or  $40  on  each  thousand 
dollars.  At  the  time  of  the  purchase  the  income  may  have 
been  attractive.  At  the  same  time  a  suit  of  clothes  mav 
have  onl}'  cost  $30,  a  hat  but  $3,  and  a  pair  of  shoes,  $4.  Five 
years  hence  the  same  suit  of  clothes  may  cost  $35,  the  hat 
$3.50,  and  the  shoes  $5,  but  the  investor  holding  a  4  per  cent 
bond  or  a  5  per  cent  first  mortgage  derives  no  greater 
income,  although  his  jDurchasing  power  is  considerably  re- 
duced. 

The  peculiar  conditions  in  England,  France  and  Hol- 
land heretofore  mentioned  are  recalled  for  no  other  rea- 
son than  to  show  that  the  United  States  is  assuming  some- 
what the  same  characteristic. 

The  investors  of  these  countries  for  lack  of  opportu- 
nities at  home  pour  millions  of  their  capital  every  j-ear  in- 
to the  development  of  the  resources  of  their  colonies  and 
of  other  countries. 

While  our  country  is  far  from  exhausting  its  almost 
unlimited  resources,  it  has  been  apparent  for  some  ^^ears 
to  keen  observers  that  the  wealth  of  (Hir  people  is  repro- 
ducing itself  at  such  a  ra]ud  pace  as  to  supply  far  more 
fresh  capital  than  is  needed  at  home  and  therefore  every 
year  finds  us  with  a  great  deal  of  money  to  spare  for  invest- 
ment in  other  countries.  We  are  taking  our  place  side  by 
side  with  England  and  France  as  a  free  and  generous  lender 
of  capital  to  smaller  but  growing  nations. 

Only  since  the  close  of  the  Spanish  War  has  the  United 


12  LOUIS  GUENTHER 

States  participated  with  much  older  nations  in  lending 
money  to  Ja])an,  C'liina,  Mexico  and  the  South  American 
Repnl)lics.  In  less  than  fifty  years,  and  of  that  more  with- 
in the  last  twenty  years,  has  this  country  attained  that  posi- 
tion of  artluence  which  l're(|uent]y  j)r(>mpts  the  reference 
to  us  as  the  land  of  a  thousand  millionaires.  Yet  beneath 
this  phenomenal  growth  in  wealth  nuist  be  the  intelligent 
emi)loyment  of  capital.  AN'hat  does  this  mean,  but  the  mak- 
ing of  shrewd  investments  ?  Were  this  not  a  fact,  we  could 
hardly  have  financed  the  Civil  and  Spanish  American  Wars, 
built  over  )^)00,000  miles  of  railroads  and  double  as  manv 
miles  of  local  traction  and  intcrurban  lines,  vast  public  im- 
provements, splendid  harbors,  and  gas  and  electric  light 
plants,  opened  up  mines  of  coal,  silver,  copper  and  gold, 
built  inunense  refineries  and  smelting  plants,  and  reared 
all  about  us  industries,  veritable  industrial  Goliaths  in  the 
great  wealth  they  control  and  in  the  gi-eat  amount  of  labor 
they  employ. 

If  George  Washington  were  to  come  back  to  life,  he 
would  be  lost  in  amazement  at  the  changes  wrought  in  this 
countrv,  although  onlv  a  little  more  than  one  hundred  rears 
have  passed  since  he  was  laid  to  rest  at  Mt.  A^'nion. 

It  would  seem  to  hiui  as  if  some  wizard  had  visited 
the  land  and  wrought  this  remarkable  change.  Yet  this 
wizard  has  l)een  none  other  than  capital — money  ])rolitably 
invested.  TIave  we  not  here  a  concrete  example  of  \hc 
unifonn  success  of  intelligent  investment?  Docs  it  not 
plaiidy  indicate  that  where  ])rudence  is  exercised  in  the 
diversification  of  investments,  there  need  Itc  little  fear  as 
to  the  outcome  of,  or  regarding  the  safety  of,  the  capital 
emploved  ? 


III.    THE  EARLIEST  INVESTMENT. 

Now,  what  are  the  types  of  securities  which  logically 
can  be  classified  under  the  head  of  investments  and  are  not 
speculative? 

In  the  first  place,  they  are  the  securities  which  are  con- 
sidered safe,  both  in  respect  to  the  capital  invested  in  them 
and  the  income  vield. 

In  the  second  place,  they  are  securities  whose  market 
value  is  more  stable  and  are  not  affected  by  violent  fluc- 
tuations as  sometimes,  and  often,  too,  influence  securities 
of  a  speculative  character. 

The  major  portion  of  investments  is  composed  usually 
of  those  behind  which  is  pledged  for  their  protection  some 
physical  property  or  a  contract  agreement  guaranteeing 
the  prompt  payment  of  principal  and  interest  by  the  issuing 
party  and  which  covenant  can  be  legally  enforced  as  long 
as  the  debtor  is  in  a  solvent  condition.  However,  there  are 
some  shares  of  stock  in  corporations  and  railroads  which 
are  regarded  as  investments  because  of  the  long  period 
during  which  they  have  paid  substantial  dividends  without 
interruption. 

It  is  therefore  to  be  clearly  seen  that  there  cannot  be 
too  close  a  dividing  line  drawn  to  differentiate  investments 
from  speculations.  In  every  case  each  must  be  appraised 
bv  its  individual  qualities  and  not  l)v  a  vard  stick.  A 
pledged  security,  that  is,  a  security  behind  which  there  is 
some  sort  of  lien  or  obligation  to  pay  without  reservation, 
may  prove,  in  case  of  insolvency,  not  to  be  an  investment 
but  an  outright  speculation. 

As  there  are  so  many  different  kinds  of  securities 
grouped  among  investments,  I  have  thought  it  best,  for  the 
sake  of  avoiding  confusion,  to  start  at  the  very  beginning 

13 


14  LOUIS  GUENTHER 

with  tlio  earliest  known  type  of  investment  and  in  sequence 
describe  each  in  its  turn  until  we  have  run  the  entire  fj^amut 
over.  At  the  same  time  it  is  also  well  to  summarize  ])rieflv 
some  of  the  elemental  features  liy  which  the  conservative 
investor  detennines  in  his  own  mind  the  degree  of  their 
safety  as  a  security  for  his  capital. 

Loans  on  fann  lands  are  no  doubt  the  earliest  fonn  of 
investment.  This  is  to  be  supposed,  since  the  first  and  pi'in- 
cipal  occupation  of  civilization  was  ac^-iculture.  Orii^a- 
nally,  such  loans  were  made  in  a  most  primitive  way.  When 
the  human  race  was  young  and  acquiring  its  first  taste  of 
civilization,  it  was  the  practice  of  one  land  o^^mer  who  pros- 
pered above  his  neighbor  from  the  bounty  of  ]\lother  Earth, 
to  make  loans  of  seed  or  live  stock  on  consideration  that  he 
receive  in  return  a  certain  portion  of  the  borrower's  next 
season's  harvest  or  a  certain  munber  of  the  offspring  of 
the  live  stock  loaned. 

But  as  civilization  made  progress,  it  was  found  far  more 
convenient  to  settle  for  all  obligations  by  the  payment  of 
gold  and  silver.  Still  in  those  early  and  primitive  days, 
when  the  commercial  relations  between  men  and  races  were 
carried  on  crudely,  lenders  of  capital  were  satisfied  to  ac- 
cept the  pledges  of  borrowers  as  men  of  honor  who  agreed 
to  pay  their  loans  on  a  stipulated  day  or  forfeit  their  land, 
cattle,  implements  or  whatever  they  pledged  to  secure 
them. 

Out  of  such  transactions  grew  the  modern  indenture. 
By  this  is  meant  the  mortgage  or  contract  whieh  today 
legally  binds  the  borrowers  to  reimburse  the  leiuler  for  a 
loan  with  a  sti])ulated  rate  of  interest  and  empowers  the 
holder  of  the  mortgage  to  proceed  by  law.  or,  as  it  is  known, 
foreclosure  proceedincfs,  to  take  possession  of  the  jjlcdircd 
pro])erty  and  dispose  of  it  in  order  to  protect  himself 
against  any  loss  of  caj^ital  and  interest. 

The  ])hrasing  of  moi't gages  has  undi-rgone  consider- 
able changes.     There  was  a  time  when  the  holder  of  a 


INVESTMENTS  AND  SPECULATION  15 

mortgage  could  take  possession  of  property  upon  default 
of  payment  and  keep  it  all.  Now,  however,  the  law  goes 
so  far  as  to  protect  the  lender  in  maintaining  his  full  rights 
in  what  equities  may  exist  over  a  loan.  That  is  to  say, 
every  dollar  realized  above  the  face  of  a  loan,  the  accrued 
interest  and  all  costs  involved  by  what  legal  proceedings 
are  necessary  to  enforce  pa^anent,  revert  to  the  lender.  The 
mortgage  today  is  a  legal  instrument  devised  to  protect 
lenders  of  capital  to  the  extent  of  their  loans,  interest  due 
and  all  costs,  but  no  fTirther.  It  does  not  give  them  any  un- 
fair advantages  over  distressed  creditors. 

Not  onlv  are  loans  on  ac^ricultural  lands  the  oldest  of 
any  we  have  a  record  of,  but  they  have  also  proved  the  most 
satisfactory.  Of  the  world's  available  capital  a  very  large, 
if  not  the  largest,  portion  is  invested  either  outright  or 
loaned  out  in  farm  land  and  other  real  estate,  also  in  l)uild- 
ings  and  homes  used  by  the  world's  population  as  places 
of  domicile. 

Moreover,  what  makes  loans  so  satisfactory  when  placed 
on  the  individual's  home  or  farm  is  the  fact  that  a  man  will 
go  to  extreme  lengths  and  exhaust  all  his  available  re- 
sources to  satisfy  a  mortgage  and  continue  the  prompt  pay- 
ment of  interest  as  it  falls  due,  rather  than  lose  the  place 
he  calls  his  home.  Next  to  the  immediate  members  of  his 
familv,  his  home  is  dearest  to  him.  This  is  whv  such  loans 
are  regarded  as  having  in  addition  to  the  physical  assets 
2)ledged  as  securities,  another — the  moral  asset,  the  pride 
of  the  individual  in  keeping  a  roof  over  his  family. 


IV.     now  FAUM  MORTGAGES  ARE  PLACED. 

Our  small  interior  banks  are  by  far  the  largest  lenders 
of  capital  on  fann  mortgages.  Insurance  companies  come 
next  and  after  them  follows  the  private  investor.  Tliat 
this  should  be  the  case  is  largely  the  outcome  of  a  com- 
munity of  interest.  Banks  and  private  bankers  in  the 
small  towTis  and  tillages  which  are  the  hubs  for  farming 
sections,  must  depend  principally  upon  the  tillers  of  the 
soil  for  their  business.  The  deposits  of  the  latter  they  in 
turn  lend  out  to  their  customers  on  the  only  collateral  the 
farmers  can  offer,  their  land,  live  stock  or  crops. 

These  bankers  also,  knowing  more  intimately  the  value 
of  the  farm  lands  by  which  they  are  surrounded,  feel  a  great 
deal  safer  about  their  loans  when  they  are  put  out  on  such 
collateral.  Yet  their  aggregate  resources,  and  they  are  by 
no  means  small,  have  often  proved  insufficient  to  finance 
all  the  farm  loans  sought. 

In  the  North,  South,  East  and  West,  everywhere,  in 
fact,  where  there  is  found  a  prosperous  farming  conunu- 
nity,  there  are  also  located  brokers  who  do  nothing  save  to 
make  loans  on  farai  mortgages,  which  in  turn,  they  sell  to 
institutions  and  investors,  for  whom  also  they  act  as  agents 
for  the  collection  of  interest  and  principal  when  the  mort- 
gage matures.  The  l)aTiks  also  frequently  find  it  to  their 
pecuniary  advantage  to  let  outside  investors  have  part  of 
their  fann  mortgages,  for  the  more  often  they  are  able  to 
tuni  over  their  loanable  funds,  the  more  money  can  they 
make. 

The  large  insurance  companies,  on  the  other  hand,  are 
impelled  by  two  reasons  in  diverting  part  of  their  large 
resources  to  farm  loans:  The  first  is  the  necessity  to  diver- 
sify their  investments,  and  the  second  is  that  the  legal  rate 

16 


INVESTMENTS  AND  SPECULATION  17 

of  interest  in  different  states  varies  to  such  an  extent  that 
it  affords  them  the  opportunity  to  increase  their  income 
yield  on  all  their  outstanding  investments. 

For  example,  the  legal  rate  of  interest  which  may  be 
charged  by  lenders  of  money  in  Illinois  is  6  per  cent,  but  in 
Georgia  it  is  8  per  cent,  while  In  some  of  the  far  western 
states  as  high  as  12  per  cent  can  be  demanded.  This  dif- 
ference in  the  rate  of  interest  borrowers  must  pay  is  not 
brought  about,  as  would  seem  to  be  the  case,  by  any  va- 
riance in  the  degree  of  safety  in  the  collateral  they  furnish, 
but  is  determined  bv  the  abundance  or  scarcitv  of  avail- 
able  capital.  Such  states  as  New  York,  Illinois,  Indiana 
and  Massachusetts  are  more  fortunate  in  the  abundance 
of  capital  than  less  favored  states  and  this  is  what  makes 
it  possible  to  borrow  at  a  smaller  rate  of  interest  than  in 
the  less  populous  states.  In  fact,  in  these  more  settled 
communities,  capital,  in  its  eager  hunt  for  desirable  loans, 
comes  so  much  in  keen  competition  as  to  offer  itself  at  less 
than  the  interest  which  the  state  has  fixed  upon  as  legal. 
Thus  it  happens  that  in  Massachusetts,  Illinois  and  other 
eastern  and  central  states,  the  owners  of  fertile  and  pro- 
ductive faiTns  can,  without  difficulty,  obtain  loans  on  a  5 
per  cent  basis. 

Although  Georgia  may  have  lands  whose  out-turn  of 
cotton  and  other  crops  indigenous  to  her  soil  will  bring 
as  much  profit  as  the  wheat  and  maize  of  the  loamy,  black 
belt  of  Central  Illinois,  her  wealth  is  not  sufficient  to  fi- 
nance all  the  needs  of  her  people  and  she  must  provide  a 
legal  interest  rate  attractive  enough  to  draw  to  her  capital 
which  is  bevond  her  borders.  Therefore,  it  is  an  axiom  that 
the  less  populated  a  state,  the  smaller  her  resources  and 
the  more  are  her  people  dependent  upon  capital  from  the 
outside,  for  after  all,  money  is  but  a  commodity  to  be  bar- 
gained for  and  which  lets  itself  nut  at  the  best  price  ob- 
tainable by  its  owners. 

In  different  states  the  rules  vary  as  to  the  extent  that 

B.Vll— J 


18  LOUIS  GUENTHER 

loans  may  be  made  on  farm  property.  In  some  places 
where  farm  lands,  because  of  their  productivity,  are  in 
eager  demand,  money  may  be  ])(U'rowed  on  them  up  to  60 
and  even  70  per  cent  of  their  supposed  market  value,  where- 
as in  states  where  the  farms  are  still  comparatively  new 
and  which  lands  capital  believes  are  not  as  readily  saleable 
in  the  event  that  thev  must  be  sold  to  satisfv  the  loan,  their 
borrowing  capacity  is  restricted  to  a  much  lower  percent- 
age. It  is  the  demand  for  the  land  which  determines  the 
equities  insisted  upon  before  a  loan  is  obtainable,  and  not 
so  much  the  fertility  and  productiveness  of  the  land  itself. 
So  also  is  it  true  of  the  interest  that  is  exacted  from  bor- 
rowers. 

Without  a  brief  mention  of  an  interesting  development 
in  the  placing  of  farm  mortgages,  the  history  of  this  form 
of  investment  would  not  be  complete.  I  have  in  mind  the 
large  business  that  is  done  in  faim  mortgages  today 
among  the  class  of  smaller  investors  who,  while  not  in  a 
position  to  purchase  such  securities  outright,  are  still  fa- 
vored with  an  opportunity  to  place  their  capital  in  them. 

From  the  demand  of  the  smaller  investor  for  farm  mort- 
gages as  their  ideal  type  of  security,  large  companies  have 
come  into  existence  which  sell  notes  of  their  own,  secured 
by  farm  mortgages.  The  capital  they  obtain  from  the  sale 
of  their  obligations,  they  place  out  in  farm  mortgages, 
which  mortgages  are  in  turn  deposited  with  some  trustee 
as  a  security  for  their  j^lodges  to  their  clients.  Tlies(»  notes 
are  quite  often  laiown  as  debenture  ])onds  and  sometimes 
they  are  otherwise  designated,  as,  for  example,  a  large 
western  concern  distinguishes  them  from  its  competitors  in 
the  same  business,  as  land  grants,  although  they  are  in  form 
alike  and  are  sold  in  as  small  denomination  as  .$100.  These 
institutions  have  made  it  so  attractive  to  small  investors 
as  to  make  it  possible  for  them  to  purchase  the  notes  by 
making  a  partial  payment  and  paying  off  the  balance  in 
easy  periodical  payments. 


V.    THE  INFLUENCE  OF  LOANS  ON  MONEY. 

At  times  the  borrowiug  requirements  of  our  farmers 
play  a  very  important  part  in  our  economic  life.  They  must 
move  their  crops,  and  money  alone  is  what  will  do  this. 
Tims  it  happens,  that,  around  harvest  time,  the  interior 
banks  find  it  necessary  and  profitable  to  advance  money 
to  fanners  on  their  notes,  secured  by  their  crops,  until  they 
can  send  the  produce  to  the  central  markets. 

It  has  often  happened  that  these  loans  have  been  pre- 
cursors of  a  tight  money  market  at  a  time  when  the  avail- 
able capital  of  the  country  has  been  insufficient  to  finance 
both  the  movements  of  the  harvest  and  the  expansion  of 
industry.  ^Miile  a  tight  money  market  may  be  produced  by 
other  causes,  more  often  it  is  superinduced  by  this  annual 
crop  demand  upon  the  resources  of  our  banks. 

AMien  this  effect  is  produced  in  our  financial  centers, 
it  is  called  a  pinch  in  money.  No  doubt  you  have  heard  of 
the  temi.  As  a  business  man  and  accustomed  to  negotia- 
ting loans  at  your  bank,  possibly  you  have  personally  felt 
its  effects  when  vour  banker  informed  vou  that  it  was  nee- 
essarv  to  increase  vour  interest  rate  until  monev  became 
easier. 

By  advancing  interest  rates,  bankers  aim  to  keep  do^^Ti 
loans  within  their  available  resources.  Our  peculiar  bank- 
ing structure  is  responsible  for  a  condition  which  spares 
none  of  the  banks  from  the  effect  of  the  tiglitness  in  money. 
Our  banks  depend  one  upon  another.  Their  interests  are  so 
closely  inter-related  and  co-operative,  that,  like  tiers,  they 
are  ])uilt  one  on  top  of  the  other,  the  largest  institutions  at 
the  bottom;  the  smallest  at  the  top. 

How  this  is  possible,  I  shall  proceed  to  illustrate.  Un- 
derlying the  interchangea))ility  of  banking  credits,  which 

19 


20  LOUIS  GUENTHER 

is  but  another  name  for  the  transaction  of  business  betT\'een 
banks  by  check,  are  what  are  known  as  reserve  centers. 
For  our  national  banks,  wliicli  are  the  institutions  char- 
tered by  tlie  National  Government,  certain  and  principal 
cities  like  New  York,  Chicago,  Boston,  St.  L<»uis,  Cincin- 
nati, etc.,  are  selected  as  reserve  centers.  Custom  and  con- 
venience alike  have  made  them  also  reserve  centers  for 
state  banks,  trust  companies  and  private  bankers. 

Tn  the  banks,  at  these  points,  it  is  the  practice  of  in- 
terior banks  to  maintain  deposits  on  which  to  issue  checks 
and  drafts.  Customers  are  constantly  sendinc:  monev  to 
these  large  commercial  centers,  and  it  would  prove  rather 
inconvenient  and  also  expensive,  every  time  a  demand  was 
made  upon  them  for  a  remittance  to  these  centers,  to  ship 
the  actual  currency.  Hence  the  funds  they  keep  on  rlp]^osit 
in  the  larcfc  reserve  centers. 

The  banks  in  the  reserve  centers  usually  allow  interest 
on  the  deposits  of  other  banks.  To  pay  it  they  in  turn  lend 
their  deposits  out  in  such  manner  nu<l  fnrni  as  to  make  such 
loans  easily  liquidable.  This  is  accomplished  by  an  ex- 
pedient kn(>wn  in  all  financial  circles  as  lending:  on  call  to 
distin,e:uish  loans  of  this  character  from  time  loans.  Call 
loans  are  different  from  time  loans,  in  that  as  the  principal 
can  be  demanded,  in  the  discretion  of  the  bank,  at  twenty- 
four  hours'  notice  to  the  borrower,  time  loans. cover  a  defi- 
nite period  of  time. 

Wlior(»  there  is  such  discretionary  power  vested  in  the 
banks  over  a  certain  form  of  loans,  it  is  readily  ajiparent 
what  influence  may  be  exertcnl  over  tlir  money  market 
when  in  the  fall  there  arises  a  demand  by  the  country  banks 
on  their  deposits  held  in  the  banks  in  the  reserve  centers. 
This  is  often  so  heavv  as  to  be  bevond  the  abilitv  of  the 
reserve  center  banks  to  care  for  comfortalily.  One  may 
also  readily  understand  the  solicitude  of  financiers  and 
stock  market  speculators  over  this  periodical  drain  and 
why  they  so  studiously  watch  for  any  signs  of  its  advent 


INVESTMENTS  AND  SPECULATION  21 

and  try  to  forecast  its  effect,  since  it  means  so  much  to 
them  in  the  success  of  their  operations. 

A  great  deal  of  money  is  borrowed  in  the  large  com- 
mercial centers  on  call,  not  always  willingly,  for  bankers 
will  not  lend  heavily  except  in  this  way.  Speculators  are 
also  often  forced  to  finance  their  operations  with  such  loans 
and  therefore  it  behooves  them  to  keep  their  thoughts  on 
the  pulse  of  the  money  market,  to  prevent  being  enmeshed 
in  a  money  pinch. 

The  har^^est  call  for  funds  has  caused  call  money,  which 
could  be  l)orrowed  only  a  few  days  previously  at  as  low  as 
one  to  two  per  cent,  to  mount  up  and  up  until  it  has  reached 
as  many  hundred  per  cent  per  annum  for  its  use  for  a  few 
days.  The  interior  banks  keep  drawing  on  their  deposits 
until  their  depositories,  to  maintain  their  own  deposits 
within  the  legal  requirements,  are  forced  quickly  to  run 
up  the  rate  of  interest,  to  force  the  liquidation  of  loans  un- 
til their  cash  position  is  again  a  comfortable  one. 

Of  course  a  tight  market  is  not  always  superinduced 
by  the  withdrawals  of  deposits  by  the  outside  banks.  Cap- 
ital may  be  in  such  abundance  at  the  time  as  to  make  the 
drain  scarcely  perceptible.  It  is  only  when  the  li(]uid  cap- 
ital is  not  sufficient  to  go  readily  around  among  all  classes 
of  borrowers  that  it  makes  itself  felt  by  such  a  phenom- 
enon. 

When  such  al)n()rmal  interest  rates  as  mentioned  pre- 
vail, s]je('ulation  is  I'ather  i)recarious  and  unattractive,  ex- 
cept to  those  who  are  sellei'S  of  securities,  and  need  not 
borrow  monev,  since  onlv  in  rare  instances  do  the  seen- 
rity  markets  escape  a  severe  decline  in  prices  when  r-all 
money  commands  a  high  premium  of  interest. 

The  above  serves  to  illustrate  the  intimate  relationship 
between  the  rural  community  and  the  city — how  much  the 
one  influences  the  other  through  the  flow  of  capital  be- 
tween them  and  how  essential  thev  are  one  to  another. 


VI.     riTY  REAL  ESTATE  COMPARED  WITH  EAKM 

LANDS. 

By  no  means  is  it  as  simple  to  wisely  select  investments 
in  real  estate  in  large  cities  as  in  farm  lands.  AVhere  once 
a  tliuruugh  knowledge  about  the  fertility  of  agricultural 
land  and  its  nearness  to  a  market  has  been  gained,  there 
is  a  fair  basis  for  safelv  determinim?  its  value  for  either 
the  purpose  of  outright  purchase  or  as  collateral  for  loans. 

But  it  is  necessary  to  apply  different  methods  to  city 
property.  Location,  conditions,  the  density  of  pt)pulation, 
as  well  as  other  factors  peculiar  to  each  urban  conunu- 
nity,  have  much  to  do  with  its  value.  LTnder  favoralde  con- 
ditions and  environment  a  parcel  of  city  land  may  under- 
go a  phenomenal  appreciation.  Again,  changes  may  occur 
to  cause  a  sharp  decline,  especially  where  property  has  gone 
up  too  rapidly.  Real  estate  booms  are  not  always  the 
healthiest  thing  for  a  comnumity;  sometimes  they  peter 
out  fast. 

The  congestion  of  population  in  certain  localities  has 
been  remarkable,  so  mueh  so  as  to  result  in  making  the 
owners  of  property  fabulously  wealthy.  That  was  because 
the  land,  being  a  stationary  quantity,  always  located  in  the 
same  place,  had  to  serve  the  requirements  of  a  multitude 
instead  of  a  few.  It  stands  to  reason  that  the  more  the 
land  is  required  by  a  population,  constantly  growing  in 
density,  the  higher  prices  will  it  command. 

"We  see  and  we  wonder  at  the  prevailing  tendency,  so 
noticeal)le  in  our  large  cities,  to  build  high  up  in  the  air. 
But  this  is  not  strange  or  something  to  marvel  at,  for  where 
land  has  })ecome  valuable,  as  happens  to  be  the  case  in  our 
many  large  cities,  it  has  become,  from  an  economical  stand- 
point, much  cheaper  to  reach  up  than  to  spread  out  over 
the  ground. 


INVESTMENTS  AND  SPECULATION  23 

Nowhere  else  have  wo  a  more  graphic  ilhistration  of 
tliis  developniont  than  in  Xew  York  City,  situated,  as  it  is, 
on  a  small  island,  its  boundaries  restricted  on  all  sides  by 
water.  Almost  all  the  available  property  is  already  oc- 
cupied. The  city's  area  is  insufficient,  and  each  year  grow- 
ing: more  so,  to  provide  comfortably  for  the  density  of  the 
po})ulation,  with  the  natural  outcome  that  the  city  has  l)e- 
come  a  city  of  skyscrapers,  each  one  vicing  with  the  other 
in  a  frenzied  effort  to  pierce  the  clouds  with  its  altitude. 
Nor  are  all  these  tall  structures  confined  exclusively  to 
the  business  sections.  Residential  property  has  also  be- 
come scarce  enough  to  force  the  community  to  erect  row 
after  row  of  tall  aj^artment  houses,  providing  homes  for 
hundreds  of  families  as  a  measure  of  relief  from  the  press- 
ing demand  from  the  population  for  living  quarters.  Sim- 
ilar conditions,  although  in  a  lesser  degree,  prevail  in  our 
other  large  cities. 

AYliere  land  is  in  such  great  demand,  as  is  the  case  in 
New  York  City,  the  natural  evolution  will  be  for  a  con- 
tinuous enhancement  in  value.  To  what  astonishing 
lengths  this  appreciation  can  sometimes  reach  is  startling- 
ly  illustrated  by  a  sale  made  a  few  years  ago  of  a  small 
piece  of  property  in  the  financial  district  of  New  York, 
barely  large  enough  for  an  ordinan^  sized  dwelling,  at  a 
price  unheard  of  before — a  price  of  $600  a  square  foot.  By 
erecting  on  this  property  a  tall  office  building  the  invest- 
ment was  made  to  pay.  It  was  not  difficult  to  till  the  struc- 
ture with  enough  tenants  willing  to  pay  rents  high  enough 
to  bring  a  satisfactory  inconio  on  the  money  put  into  the 
building. 

Ft^ur  hundi'od  years  back,  what  only  one  square  foot 
of  this  ])roperty  brought  W(Mild  have  purchased  the  whole 
island  of  ^Tanhattan,  for  the  value  of  the  trinkets  Peter 
]^rinuet  turned  over  to  the  Indians  in  order  to  acquire  pos- 
session of  it,  was  hardly  worth  more  than  $nOO.  Yet  were 
this  land  not  serving  a  dense  population  and  situated  where 


24  LOUIS  GUENTHER 

it  could  not  bo  used  for  anything  else  than  agricultural  pur- 
poses, it  would  be  almost  worthless,  as  it  is  incapable  of 
producing  any  vegetable  life,  so  rocky  and  barren  is  the 
soil. 

The  growth  of  our  urban  population  has  opened  a  field 
for  the  exploitation  of  capital  <>n  a  scale,  the  uiairnitude 
of  which  is  almost  inconceivable.  Tt  has  nuuU'  it  jilmost 
compulsory  in  the  purchase  of  a  great  deal  of  such  real  es- 
tate to  depend  in  n  large  measui'e  on  borrowed  capital. 
Sa^^ngs  banks  especially,  find  it  ])rofita1)le  to  jilacc  a 
greater  part  of  their  deposits  in  loans  on  city  property  in 
the  fonn  of  first  mortgages.  But  as  a  safeguard  they  C(iu- 
fine  their  loans  to  improved  jn-operty  already  used  for 
either  business  or  residential  purposes  and  bringing  an  in- 
come. 

The  savings  banks  are  restricted  by  law  to  such  loans 
to  prevent  their  deposits  from  being  tied  u]^  in  property 
not  producing  any  revenue.  The  idea  is  that  this  last- 
named  class  of  property  is  not  quickly  saleable. 

Where  the  individiial  investor  places  his  cajMtal  in  loans 
on  city  real  estate,  whether  he  assumes  the  entire  loan  or 
])ut  part  of  it,  he  sh(ndd  exercise  the  greatest  care  in  select- 
ing the  property  which  is  to  serve  as  his  collateral.  The 
title  to  the  property  should  be  without  a  tlaw,  (►therwise 
a  cloud  will  be  upon  it,  acting  as  a  bar  to  its  free  and  quick 
transfer.  AVithout  a  clear  title  no  l(»an  should  be  made. 
Again  all  loans  ought  to  be  confined  to  a  certain  pro]ior- 
tion  of  the  appraised  value  (^f  the  property  to  provide  a 
sufficient  equity  to  protect  the  loan.  Real  estate  values  can 
easilv  be  ascertained.  This  information  is  readilv  acces- 
sible,  for  every  city  keeps  a  careful  record,  for  the  purpose 
of  collecting  taxes,  of  all  transfers  of  property  and  these 
records  are  open  to  inspection. 

Even  here  modern  methods  have  simplified  this  neces- 
sary work  of  investigation.  Tn  every  city  of  importance, 
institutions    have  grown  u])  which  make  it  their  business 


INVESTMENTS  AND  SPECULATION  25 

to  search  real  estate  titles  and  for  which  service  they  charge 
a  nominal  fee.  Their  records  are  so  complete  that  their 
abstracts  of  title  are  accepted  without  question.  When 
they  guarantee  their  titles,  as  most  of  these  companies  will, 
they  insure  their  clients  against  loss  from  any  flaws.  They 
have  reduced  the  work  of  searching  titles  to  a  degree  of 
accurac.v  that  today  few  buyers  of  property  or  few  loans 
are  made  unless  the  titles  are  first  guaranteed  by  them. 

As  for  the  borro\\'ing  capacit}"  of  real  estate,  this  is 
largely  determined  by  its  location.  This  relatively  in- 
creases, the  nearer  the  land  is  to  the  center  of  business  and 
to  transportation  facilities  and  conversely  decreases  the 
further  awav  its  location.  More  monev  can  also  be  bor- 
rowed  when  there  are  improvements  in  the  form  of  build- 
ings upon  property,  for  the  probabilities  are  that  such  real 
estate  is  alwavs  more  readilv  saleable  and  is  more  likely 
to  enhance  in  value  as  the  population  increases,  assuring 
a  quick  sale  in  case  it  is  necessary  to  find  a  buyer  in  a  hurry. 
Of  all  property,  outlying  suburban  real  estate  is  the  most 
unsatisfactory  collateral,  as  it  lacks  these  essential  require- 
ments. 

The  capital  which  finds  its  way  into  real  estate  invest- 
ments is  drawn  from  various  sources,  coming  alike  from 
large  financial  institutions,  from  wealthy  individual  in- 
vestors and  from  the  humble  and  thrifty  masses.  There  is 
an  enormous  business  transacted  in  real  estate  mortgages. 
To  serve  investors  who  are  not  able  to  buy  mortgages  out- 
right, large  financial  institutions  have  evolved  what  is 
called  a  first  mortgage  real  estate  bond.  These  bonds  they 
guarantee,  both  in  regard  to  the  money  invested  in  them 
and  the  interest.     This,  thev  can  safelv  do,  as  thev  first 

'  *■  «.  /  ft. 

thoroughly  appraise  the  value  of  the  property  on  which 
these  bonds  are  a  mortgage,  and  satisfy  themselves  re- 
garding the  titles.  In  New  York  City  there  are  several 
of  these  concerns  which  have  behind  them  resources  in  ex- 
cess of  a  hundred  million  dollars  and  in  no  case  has  there 


26  LOUIS  GUENTHEK 

ever  boon  a  (Icfanlt  in  tlio  paynifiit  of  priiici]inl  or  intorost 
in  the  niort£!:a^^o  ])()n(ls  behind  whieh  stands  tlieir  trnar- 
antoo.  This  merely  servos  to  show  how  earefnl  they  are 
witli  tlieir  loans. 

Their  mortgage  bonds  are  sold  at  a  fignre  prodncing  an 
ineomc  ranging  between  4h  and  5  i)er  cent,  as  they  are  a 
part  of  a  first  mortgage  loan  and  the  laws  of  safety  and 
prudence  exact  that  such  loans  be  confined  to  desirable 
property.  There  has  also  developed,  as  a  result  of  the  large 
operations  in  real  estate,  corporations  offering  investors 
somewhat  more  inviting  inducements  for  the  use  of  their 
capital  in  extending  their  operations  in  real  estate.  A  num- 
ber of  these  companies  have  been  very  successful  and  their 
securities  are  favorably  received  in  conservative  financial 
eircles.  Their  securities  are  kno^^Tl  as  debenture  bonds. 
They  are  uot  first  mortgage  bonds,  1)ut  merely  uotes  of 
these  corporations  and  of  course,  to  make  them  attractive, 
they  are  placed  on  a  6  per  cent  income  basis. 

Some  of  the  younger  real  estate  and  holding  corpora- 
tions even  fix  the  interest  on  their  debenture  bonds  at  a 
more  attractive  figure,  but  it  is  well  for  the  investor  to  re- 
member that  his  risk  increases  in  proportion  to  the  more 
interest  that  is  ]^aid  on  his  money.  In  normal  times  it  is 
not  difficult,  in  a  large  city,  to  raise  money  on  real  estate 
for  anywhere  from  5  per  cent  to  6  per  cent  even  when  it 
is  located  in  the  outlving  sections  and  anv  hii^her  rate 
should  be  carefully  scrutinized. 

As  real  estate  debenture  bonds  have  no  other  security 
behind  them  than  the  credit  of  the  corporations  issuing 
them,  it  is  advisable  to  inspect  carefully  their  financial 
condition.  The  conservatively  managed  com]iauies  are 
aware  of  the  need  to  inspire  confidence  in  their  (obligations 
if  they  are  to  find  a  ready  market  for  them  and  to  beget 
this  confidence  they  make  known  their  actual  financial  con- 
dition at  least  once  a  year,  some  of  them  even  going  beyond 
merely  publishing  a  balance  sheet.    They  employ  chartered 


INVESTMENTS  AND  SPECULATION  27 

accountants  to  certify  to  tlie  correctness  of  the  different 
items  of  assets  and  liabilities,  and  reliable  real  estate  ap- 
praisers to  check  over  their  real  estate  holdinc^s  to  assure 
their  bondholders  aiiainst  the  likelihood  of  anv  inflation 
or  reckless  management  of  the  funds  intrusted  to  their  care. 

It  is  well  for  the  purchasers  of  the  securities  of  the  nu- 
merous real  estate  concerns,  to  insist  not  only  upon  a  com- 
plete financial  statement  of  their  condition,  but  likewise 
upon  the  location  of  their  properties.  In  recent  years  quite 
a  number  of  these  concerns  have  spruno-  up,  some  of  which 
are  by  no  means  conducting  their  business  ah^ng  conserva- 
tive lines.  Their  real  estate  holdings  may  be  situated  in 
the  outlying  suburbs,  considerable  distance  from  transpor- 
tation facilities;  their  value  may  also  be  inflated,  as  there 
is  no  check  upon  their  appraisals  where  no  independent 
estimate  has  been  made  by  competent  real  estate  experts. 

Some  of  these  concerns,  with  an  idea  of  inspiring  con- 
fidence, have  christened  their  securities  with  high-sound- 
ing titles  such  as,  for  instance,  ''participating  bonds," 
''mutual  profit-sharing  bonds,"  and  the  like.  Names  do  not 
impart  security.  A  number  of  such  securities,  after  a  per- 
sonal investigation,  have  been  found  as  hollow  as  a  bell. 

No  first  mortgage  real  estate  bond  should  be  accepted 
as  such  unless  it  is  so  stipulated  on  the  face  of  the  bond 
and  in  the  indenture  of  the  mortgage.  There  are  second 
and  third  mortgage  real  estate  bonds,  but  they  are  graded 
as  more  speculative,  as  they  are  but  a  lien  on  the  value  of 
the  equity  above  the  first  mortgage.  This  should  suggest 
what  care  should  be  exercised  in  their  selection.  While 
some  of  these  mortgages  may  be  perfectly  sound,  in  trouble- 
some financial  periods  they  are  not  the  most  desirable  class 
of  securities  to  hold,  especially  when  they  are  a  lien  on  out- 
of-the-way  real  estate. 

Unless  such  mortgages  are  secured  bv  centrallv  lo- 
cated  property,  with  a  lil^eral  margin  of  value  above  the 
underlying  mortgages,  banks   will  hesitate  to  lend  any 


28  LOUIS  GUENTHER 

money  on  them,  while  savings  banks  are  restricted  by  law 
in  most  states  from  considering  such  mortgages  at  all  as 
collateral  for  loans. 

Second  and  third  nidrtgages  are  largely  the  creation  of 
builders.  To  make  it  as  easy  as  possible  for  buyers  of 
homes  to  pay  off  their  obligations,  they  undertake  to  carry 
a  second  mortgage  payable  in  a  year  or  more.  Tt  is  in  this 
way  builders  principally  finance  themselves. 

I  know  of  an  instance,  illustrative  of  how  undesiral)le 
are  such  moi-tgages,  where  a  woman  in  the  panic  of  1907 
was  compelled  to  pay  a  bonus  of  $100  to  renew  a  second 
mortgage  of  $1,000  on  a  substantial  home  in  Brooklyn.  Her 
interest  for  one  year,  including  this  bonus,  came  to  16  per 
cent.  This  is  fairly  indicative  of  the  element  of  risk  that 
capital  considers  it  assumes  on  such  obligations. 

Large  office  l)uildings,  factories  and  apartment  houses 
are  being  financed  more  and  more  with  outside  capital.  A 
])lanket  mortgage  is  placed  on  these  structures  and  then 
s]>lit  up  into  an  issue  of  bonds  in  small  denominations. 
These  bonds  are  then  offered  investors  on  an  attractive 
basis.  This  class  of  ])usiness  is  growing  in  large  propor- 
tions. Conservative  bankers  find  it  profitable,  and  the 
bonds,  when  issued  within  proper  restrictions,  are  an  ex- 
cellent security  for  tlie  medium  grade  investor. 

lieasehold  lt<»nds  nvo  tlie  latest  form  of  real  estate  bonds. 
So  far,  they  are  a  security  largely  confined  to  New  Y(U'k 
City,  where  ]iro])erty  lias  become  too  valuable  for  their 
owners  to  sell  it  outright. 

The  Astor,  Cioelet,  Hhiuelander  and  other  large  New 
York  estates  owning  valualde  tracts  of  land  in  the  heart 
of  the  city  follow  the  system  of  leasing  their  ]u'o])erty  for 
a  term  of  years,  at  a  sti]>ulated  annual  rental.  The  ar- 
rangement is  made  by  the  leaseholders  that  the  im]H'ove- 
ments  they  make  are  to  be  turned  over  to  the  owners  of 
the  property  at  the  expiration  of  the  lease  for  an  agreed 
sum.    Leaseholds  arc  transferable  in  the  same  manner  and 


INVESTMENTS  AND  SPECULATION  29 

form  as  arc  deeds.  Bonds  are  also  issued  against  tliese 
leaseholds,  but  for  the  protection  of  the  investors,  they 
should  mature  before  the  lease  expires  and  there  should 
be  set  aside  a  certain  portion  of  the  revenues  each  year  as 
a  sinking  fund  to  retire  the  bonds  when  they  fall  due. 

The  outright  purchase  of  real  estate  must  be  largely 
determined  by  location  and  the  income  it  produces.  No 
general  rule  can  be  laid  down.  However,  it  is  advisa1)le 
under  all  circumstances,  before  buying  real  estate,  to  make 
a  personal  investigation  of  the  property  or  employ  a  capa- 
ble, experienced  and  honest  real  estate  agent  to  make  an 
ajtpraisal  of  its  value.  Where  this  is  done,  there  is  slight 
danger  of  making  any  serious  mistakes. 


\\\.     LAND  AND   Iv'KAL   i:s'|\\TK   1500MS. 

AW'  (uiL;lit  not  to  ])e  too  hasty  in  deprecating,  as  we  are 
often  inclined,  the  periodical  onthnrsts  of  speculation  in 
land  in  this  country.  This  is  a  healthful  symptom  of  a 
growin<]^  nation's  strong  vitality,  which,  impatient  of  ex- 
l)anding  norninlly,  att('ni])ts  to  si^rcad  out  witli  Icajis  and 
honiids. 

W'liile  it  may  be  ti'iie,  that  trying:  to  forge  aliead  faster 
tlian  our  resources  permit  brings  exhaustion  as  a  penalty 
mitil  we  can  again  take  breath  to  catch  up  with  the  fast 
pace  set,  the  l^enefits  of  a  i^ennanent  character  i-esulting 
from  extensive  speculation  in  land  cannot  be  computed. 
Without  the  speculation  it  is  seriously  to  be  questioned 
whether  this  country  would  have  grown  as  ra]>i(l]y  as  it 
has  ill  the  last  fifty  years  and  the  (In^at  "West  become  so 
densely  populated.  There  is  always  the  strongest  sort  of 
incentive  for  the  development  of  new  agricultural  re- 
sources behind  every  boom  in  land.  The  peo]>le  who  ])ar- 
tiei])ate  in  them  are  made  \\\)  largely  of  farmers  who  are 
not  satisfied  merely  with  the  j)urchase  of  new  farm  lands 
to  hold  them  for  an  increase  in  their  valu(\  'V\\vy  J)uy  more 
to  operate  and  make  their  "jirofits  out  of  the  larger  crops 
they  ex])ect  to  raise  from  a  more  pmlific  soil,  liecause  it  has 
not  ])een  worked  over  and  over  again.  \Vhei*e,  too,  men 
flock,  there  follows  the  railroad  and  other  conveniences 
which  ai-e  necessary  to  a  growing  conmiuniiy.  New  towns 
s])iMng  up  and  a  demand  for  new  industries  d(n-elo])s,  which 
capital  is  always  ]ir(j)arcd  to  su]i]iort  when  it  sees  there  is 
a  necessity  for  them.  Tonsidering  the  general  •l)enefits 
arising  from  land  booms,  we  can,  from  a  i»road  standpoint, 
well  afford  to  suffer  what  temporary  ill  effects  follow  in 
their  wake. 

30 


INVESTMENTS  AND  SPECULATION  31 

Nor  is  it  a  racial  instinct  2)cculiar  to  ns  as  a  people  tluit 
we  become  occasionally  obsessed  with  a  blind  belief  in  the 
possibility  of  makino-  a  great  deal  of  money  quickly  mit 
of  land  throngh  an  immediate  increase  in  values.  The 
same  trait  may  be  detected  in  the  people  of  most  of  the 
other  nations  whose  agriciiltiii'al  resources  have  not  l)een 
full}'  developed. 

It  is  true  that  the  Pilgrims  who  came  over  in  the  Mav- 
flower  sought  our  ^lassachusetts  shores  to  escape  religious 
persecution,  but  those  who  followed  them  in  a  steady  and 
constantly  growing  stream,  were  impelled  l)y  a  wholly  dif- 
ferent reason.  The  letters  the  Pilgrims  sent  ])ack  home 
telling  of  the  bounteous  returns  their  farms  in  the  new 
world  brought  forth,  inspired  others  to  tempt  fortune  in 
the  larger  opportunities  the  New  World  had  to  offer.  The 
same  was  true  of  the  Dutch  who  settled  in  New"  Amster- 
dam, now  New  Yoi'k,  and  of  the  Cavaliers  who  estaldished 
themselves  in  new  homes  in  Virginia  and  other  neighbor- 
ing southern  states  skirting  the  Atlantic  Ocean. 

Aside  from  his  occupation,  the  farmer  is  as  instinctive- 
ly human  as  are  his  brethren  in  the  large  cities.  He  wants 
to  make  money.  If  he  can  dispose  of  his  fami  at  a  good 
profit,  there  is  a  strong  inclination  in  him  to  take  advan- 
tage of  such  an  opportunity.  Such  chances,  farmers  in  our 
more  densely  po])ulated  states  have  had  in  plenty.  In 
comparing  the  statistics  with  respect  to  the  value  of  farm 
lands  in  the  central  and  western  states  east  of  the  Rocky 
Mountains,  shortly  after  the  Civil  War,  with  those  of  pres- 
ent values,  we  are  struck  forcibly  with  the  phenomenal  en- 
hancement that  has  taken  ]-)lace  A\'ithin  this  comparatively 
short  period.  Fanns,  which  in  the  early  seventies  could 
have  been  had  for  fi-om  ^10  to  $15  an  acre,  are  not 
now  obtainable  at  less  than  $100  to  $125  an  acre.  Even 
within  the  memory  of  the  rising  generation,  startling  in- 
creases in  land  values  have  taken  ]^lace.  The  opening  of 
the  Sioux  Eeservation  m  South  Dakota  is  a  case  in  point. 


32  LOUIS  GUENTHER 

Tliis  was  barely  fifteen  years  ago.  The  settlers  who  flocked 
to  this  reservation  when  the  Government  opened  it,  were 
able  to  buy  the  land  for  a  triflini:^  sum  per  acre.  Although 
now  cultivated,  this  very  same  land  changes  hands  at 
jDrices  varying  from  $60  and  upward  an  acre,  while  lots  in 
the  new  towns  which  grew  u])  in  what  was  then  only  a 
grazing  country,  which  might  have  been  had  for  a  few 
dollars,  have  increased  in  value  from  100  per  cent  to  1,000 
per  cent. 

Thus  it  was  also  wjth  Oklahoma  and  Indian  Territory. 
When  these  new  territories  were  opened  for  settlement, 
land  was  extremely  cheap,  but  the  pioneer  fanners  who  lo- 
cated there  have  become  rich  from  the  soil's  fertility  and 
the  rise  in  values. 

"Within  the  last  few  years,  however,  we  have  witnessed 
a  remarkable  change  in  land  speculation.  There  has  been 
a  steady  migration  of  American  farmers  into  the  new 
wheat  belts  of  Canada.  Those  who  have  watched  this  move- 
ment estimate,  and  their  estimate  is  considered  conserva- 
tive, that  at  least  300,000  American  farmers  have  gone  into 
Manitoba,  Alberta  and  Saskatchewan,  to  establish  new 
homes  for  themselves,  having  heard  all  about  the  possibil- 
ities of  raising  large  crops  in  these  lands.  Rapid  exten- 
sion in  railroad  building  has  followed  in  their  foot-steps 
to  provide  adequate  transportation  facilities  for  the  move- 
ment of  their  crops. 

But  this  migration  to  a  neighljoring  eountry,  eml)()dies 
no  unusual  aspects.  There  is  a  good  reason  for  it.  Most 
of  the  natural  arable  soil  in  the  United  States  has  already 
been  taken  up  and  exploited:  there  remains  but  very  little 
new  land  available,  that  is,  adaptable  to  the  money-mak- 
ing opportunities  associated  with  new  and  virgin  lands. 
What  will  be  the  result?  Henceforth  we  are  less  likely  to 
witness  again  such  wides]»read  land  booms,  such  as  marked 
so  conspicuously  that  ]ieriod  of  our  growth  between  the 
seventies  and  the  earlv  nineties.    The  value  of  our  arable 


INVESTMENTS  AND  SPECULATION  33 

lands  will,  of  course,  continue  to  increase,  but  this  increase 
will  be  on  a  more  uniform  and  conservative  scale  because 
of  tlie  restricted  opportunities. 

If  we  are  to  see,  from  now  on,  any  speculative  opera- 
tion on  a  large  scale,  more  likely  it  will  take  place  in  ir- 
rigated lands.  Here  we  begin  to  see,  thus  early,  many  of 
the  aspects  which  markedly  distinguished  our  early  land 
booms.  Irrigation,  as  the  name  distinctly  defines,  is  arti- 
ficial fanning.  It  means  bringing  to  arid  land  what  it  most 
needs  to  make  it  fertile,  water.  Where  water  has  been 
plentiful,  this  form  of  farming  has  proved  very  profitable, 
in  some  districts  crops  being  raised  in  proportions  impos- 
sible on  arable  farm  lands.  The  Government  and  private 
capital  are  working  hand  in  hand  to  reclaim  a  great  many 
millions  of  acres  of  arid  land  capable  of  being  properly  irri- 
gated. As  fast  as  this  arid  land  is  put  in  shape  to  be  avail- 
able, there  will  develop  a  growing  demand  for  it  and  as  a 
result  of  this  demand,  there  will  arise  considerable  specu- 
lation. There  is  now  being  attemi)ted  the  experiment  of 
draining  swamp  lands  to  meet  the  cry  for  more  land  in 
this  countrv.  The  demand  is  for  more  land  to  raise  the 
common  necessities  of  life  for  a  continually  increasing  pop- 
ulation. 

So  far  we  have  considered  only  broadly  the  beneficial 
effects  of  speculation.  For  guidance,  though,  to  the  indi- 
vidual wlio  may  regard  with  favor  the  speculative  oppor- 
tunities in  the  purchase  of  land,  the  proposition  must  be 
considered  from  a  different  and  more  specific  viewpoint. 
Unless  one  is  thoroughly  familiar  with  the  science  of  farm- 
ing, he  is  apt  to  blunder  seriously  in  making  an  investment 
in  farai  land,  for  not  all  land  is  always  what  it  is  repre- 
sented to  be.  Associated  with  every  land  boom  is  the  vio- 
lent tendency  to  rush  values  upward,  far  ahead  of  the  pur- 
chasing power,  and  in  consequence  there  is  always  a  great 
danger  of  buying  at  the  crest  of  a  speculative  wave  and 
the  buyer  may  then  find  himself  with  property  on  his 

B.VII— j' 


34  LOUIS  GUENTHER 

linnds  wliicli  ho  iiiav  have  to  hold  for  some  rears  l)efore  he 
has  chance  to  a^aiu  ^et  lid  df  it  at  a  profit.  Meaiiwliile 
liis  iiivestnicnt  yields  no  income  snch  as  capital  is  supposed 
to  ]trodnce  to  be  ])rofital)ly  employed.  Tn  addition  he  suf- 
fers a  direct  loss,  for  taxes  must  he  ])aid  and  im])rovements 
made  from  time  to  time,  all  of  which  call  for  the  outlay 
of  more  capital.  It  may  even  happen  that  he  may  never 
a^ain  see  the  price  his  land  cost  him.  There  are  many  lo- 
calities where  this  has  been  the  fi^eneral  experience. 

A\'ith  a  person  who  Iniys  fann  land  for  the  purpose  of 
cultivating  it,  there  is  not  this  danger,  lie  can  make  his 
property  produce  an  income  while  he  is  holding  it  to  resell 
at  a  profit.  AMu-n  buying  land,  whether  for  investment  or 
speculation,  it  is  always  the  safer  course,  where  it  is  at  all 
ix)ssible,  first  to  visit  the  land  and  make  a  thorough  in- 
vestigation, not  only  with  regard  to  its  fertility,  but  to  ob- 
tain a  fair  idea  about  the  value  of  neighboring  fann  lands. 
AVhere  this  is  done,  the  danger  of  buying  at  inflated  values 
is  very  much  lessened.  If  a  personal  inspection  is  not  pos- 
sible, the  very  next  best  step  is  to  depend  upon  some  one 
familiar  with  farming,  and  whose  judgment  can  be  de- 
l^ended  upon  for  advice.  But  the  very  best  thing  for  a  per- 
son who  is  himself  incapable  of  cultivating  a  farm,  is  to 
forego  such  s]K'Culative  opportunities,  for  th(^  risk  is  al- 
ways the  greater  where  one  has  the  least  knowledge  abcnit 
the  character  of  the  speculation  dal)l)led  in. 

If  is  impossible  to  elaborate  in  detail  nn  the  di ff (»rent 
])hases  of  s]^eculation  in  land  within  the  restricted  space 
within  which  I  am  allowed  to  cover  such  a  broad  subject  as 
is  contained  under  the  heading  of  "Investments  and  Spec- 
ulation." T  c.iii  onlv  discuss  it  in  the  broadest  light  and 
attempt  to  lay  down  such  general  rules  for  guidance  as  are 
the  UKtst  impoi'tant,  but  I  could  not  com]ih'te  tliis  section 
without  touching  u]ion  the  many  schemes  launched  from 
time  to  time  to  intc^rest  ca]iital  in  co-o]ierative  farming. 

So  far  as  I  can  detennine,  only  a  few  such  plans  have 


INVESTMENTS  AND  SPECULATION  35 

proved  profitable  to  those  who  have  pUieed  their  money  in 
them.  There  have  been  plantation  schemes  innumerable, 
launched  in  the  last  few  years,  a  great  many 'in  Mexico, 
some  in  other  tropical  countries.  These  plans  appear  feas- 
ible enous^h.  The  idea  is  to  cultivate  one  big  plantation 
and  divide  the  proceeds  from  each  hai'^^est  among  the  many 
different  owners  who  are  the  certificate  holders.  The  main 
trouble  with  most  of  these  enterprises  is  that  they  begin 
with  an  excessive  capitalization,  representing  more  than 
the  land  can  possilily  be  worth  even  many  years  hence. 
Where  this  is  not  the  mistake,  the  chief  trouble  lies  in  in- 
experience in  handling  a  plantation.  Overseers  are  em- 
ployed who  know  little  about  the  climatic  conditions  and 
about  raising  the  crops  indigenous  to  a  tropical  country. 
One  might  as  well  transplant  a  native  of  Mexico  or  Yuca- 
tan to  an  Illinois  farm  and  expect  from  him  the  same  de- 
gree of  efficiency  as  a  farmer  accustomed  to  the  soil  and 
methods  of  cultivation.  Ruliber  plantations  are  also  plen- 
tiful but  financially  they  have  rarely  proved  successful. 
All  phases  of  farming  seem  to  have  defied  so  far  all  efforts 
to  reduce  it  to  a  co-operative  basis.  It  still  remains  an  in- 
dividual science. 

Of  late  there  has  appeared  a  tendency  to  concentrate 
the  ownership  of  large  agricultural  properties  in  tliis  coun- 
try into  stock  companies.  In  the  Northwest  there  have 
sprung  up  orchard  propositions  in  wliich  private  investors 
are  solicit(^d  to  take  "units,"  each  unit  re])resentinu:  tli<^ 
ownership  of  either  one  or  a  given  inniilx'r  of  acres,  and 
the  proceeds  from  the  fniits  raised  on  the  property  arc 
apportioned  among  the  unit  holders.  Tliis  idea  is  a  new 
one.  It  is  yet  too  early  to  judge  whether  the  ])lnn  can  bo 
made  a  permanent  success,  financially.  So  far  it  has  ])cvn 
experimental.  The  idea,  however,  is  Ijcing  applied  to  other 
products  of  the  soil,  to  oranges,  to  bananas  and  even  to  nuts 
in  the  South.  I  have  even  become  aware  recently  of  an 
ambitious  plan  to  operate  a  large  wheat  farm  in  Canada 


36  LOUIS  GUENTHER 

on  the  same  lines.  But  I  still  hold  that  the  most  profitable 
fanninjj;  is  that  where  the  owner  of  the  land  directly  sup- 
erintends the  cultivation  rather  than  delegates  it  to  stran- 
gers, who  cannc^t  be  expected  to  have  the  same  interest  in 
its  success  as  the  real  owners. 

Suburban  real  estate  is  and  always  will  be  a  jxipular 
outlet  f(>r  the  speculative  inclinations  of  a  comnuniity,  l)e- 
cause  there  considerable  money  has  been  made  out  of  such 
property  by  those  who  were  either  wise  in  their  selections 
or  fortunate.  As  a  city  grows  in  population  the  tendency 
is  to  spread  out  on  adjoining  lands.  Considerable  money 
is  also  lost  in  such  speculations.  Take,  for  example,  New 
York  City.  As  the  city  is  constituted  at  present,  it  covers 
five  boroughs,  including  Stateu  Island.  Boomers  of  New 
York  City  suburban  properties  will  so  word  their  an- 
nouncements as  to  convey  the  ini})ression  that  their  prop- 
erty is  a  part  of  the  city  proper,  when  this  is  far  from  the 
case.  How  much  one  may  be  deceived  is  shown  by  an  il- 
lustration coming  mider  my  notice  regarding  two  small 
suburbs  on  the  Long  Island  Railroad.  One  of  these  places 
is  36  miles  distant  from  the  City  Hall,  the  other  but  29 
miles;  yet  the  price  placed  on  lots  in  the  suburbs  furthest 
away  averages  about  $200  a  lot,  whereas  lots  of  the  same 
area  in  suburbs  nearest  to  the  city  and  having  equally  good 
transportation  facilities  and  requiring  less  time  to  reach, 
are  to  be  had  at  less  than  $100.  Here  is  an  object  lesson 
which  requires  no  further  discussion. 

The  same  inflation  can  be  found  in  suburban  real  estate 
outside  the  limits  of  most  of  our  large  cities.  Chicago, 
when  it  had  its  suburban  real  estate  boom,  ])revious  to  the 
World's  Fair,  was  similarly  afflicted  and  lots  bought  in  some 
of  the  mushroom  outlying  settlements  have  never  agaiu 
seen  their  first  offering  price  and  are  likely  never  to  see 
it  again,  as  the  path  of  the  city's  growth  has  not  extended 
that  far  or  has  gone  in  different  directions.  Suburban  real 
estate,  or  even  city  real  estate  proper,  should  never  be 


INVESTMENTS  AND  SPECULATION  37 

purchased  on  mere  say-so  or  description.  It  should  first  be 
visited  by  the  purchaser,  who  at  the  same  time  should  spend 
a  little  time  looking-  into  property  values  in  the  neighor- 
hood  and  finding  out  about  transportation  facilities.  It  is 
the  last-mentioned  which  makes  the  pro])ei'ty  and  lays  the 
foundation  for  an  increase  in  its  value.  The  people  who 
live  in  the  suburbs  do  so  for  economical  reasons.  They  can 
build  their  homes  and  maintain  them  cheaper  than  in  the 
city  itself.  But  they  nuist  have  quick  transit  facilities  to 
and  from  their  occupations.  Along  the  principal  avenue 
of  the  movements  of  this  element  of  the  population,  real 
estate  will  always  prove  profitable  speculation.  The 
science  lies  in  finding  where  that  is  and  then  getting  prop- 
erty on  a  reasonable  basis  of  value. 


Ym,    THE  :y[ULTTPLTCTTY  AXD  ^O^rPLEXTTY 

OFBOXns. 

It  is  only  possible  to  fonii  a  clear  conception  of  the 
many  different  types  of  securities  marked  as  bonds  on  the 
shelves  of  investment  dealers  when  they  are  cfronped  one 
after  the  other  in  their  order  of  importance  and  marshalled 
before  the  mental  vision.  "We  may  then  gain  a  fair  idea, 
not  alone  of  their  variety,  l)nt  of  their  mnltiplicity,  and 
from  that  realize  how  their  complex  character  can  confuse 
investors  unless  they  are  thoroughly  posted  in  this  line  of 
investments. 

There  are  first  mortgage  bonds,  second  mortgage  bonds, 
third  mortgage  bonds  and,  on  some  of  our  large  railroad 
systems,  even  fourth  mortgage  bonds,  each,  in  its  tuni,  be- 
ing secured  by  a  lion  on  the  propei^ty  of  the  railroad  in  the 
sequence  of  its  issue.  To  make  it  plain,  it  is  best  to  de- 
scribe in  the  beginning  what  is  meant  by  a  mortgage  bond. 
In  character  it  is  not  different  from  a  mortgage  on  a  parcel 
of  real  estate,  except  in  the  respect  that  a  real  estate  mort- 
gage is  usually  owned  by  one  indi^^(lual,  whereas  there  are 
hundreds  and  often  thousands  of  investors  interested  in 
the  same  mortgage  issued  by  a  railroad  or  some  other  large 
corporation  on  its  property.  Tlie  way  this  is  brought  about 
is  as  follows:  First,  a  mortgage  for  the  amount  of  the  loan 
is  properly  drawn  up  and  recorded;  then,  in  turn,  it  is  regis- 
tered with  some  trust  company  which  acts  as  a  trustee. 
Ponds  are  issued  in  certain  denominations  against  the 
mortgage.  Tlie  denominations  are  usually  m  amounts  of 
$500,  $1,000  or  $r).000.  TTowever.  there  is  nothing  to  pre- 
vent their  being  in  $10,000  or  $20,000  or  even  for  as  small 
a  figure  as  $100,  as  this  is  a  matter  largely  left  to  the  dis- 
cretion of  those  bankers  who  arrange  the  bond  issue.    Cus- 

38 


INVESTMENTS  AND  SPECULATION  39 

tom,  however,  with  us,  has  larj^ely  favored  $500  or  $1,000 
bonds.  To  more  widely  distribute  bonds  among  smaller  in- 
vestors, bonds  of  $100  denomination  have  lately  been  in- 
creasing in  popularity. 

Each  bond  represents  a  direct  interest  in  the  mortgage 
for  exactlv  the  denomination  it  calls  for;  that  is  to  sav,  the 
borrower  has  j^ledged  certain  collateral  to  guarantee  the 
payment  of  the  bond  upon  the  expiration  of  a  given  period 
of  time,  together  with  a  fixed  per  cent  of  interest  each 
year,  payable  on  demand,  either  annually,  semi-annually 
or  quarterly. 

The  difficulty  of  borrowing  considerable  money  from 
one  or  a  few  individuals  in  large  transactions  can  l)e  read- 
ily appreciated.  Thus,  to  facilitate  borrowing  hj  large  en- 
terprises, modem  finance  has  evolved  the  scheme  of  split- 
ting up  the  loan  in  so  many  integral  parts,  each  part  con- 
stituting a  bond.  The  Pennsylvania  Kailroad,  for  example, 
has  outstanding  against  its  main  line,  a  first  mortgage  of 
$100,000,000.  Xow  it  is  not  possible  to  raise  such  a  large 
sum  from  one  individual;  therefore  it  is  obtained  throu2:h 
many,  by  the  means  of  bonds,  as  has  already  been  described. 
There  is  one  trustee,  usually  a  responsible  trust  comjiany, 
with  whom  the  mortgage  is  lodged.  It  is  the  mission  of  this 
trustee  to  safeguard  the  holders  of  the  bonds  by  carefully 
scinitinizing  the  indentures  of  the  mortgage  to  ascertain 
and  satisfy  itself  of  their  legality,  and  furthennore  that  the 
collateral  described  as  securing  the  mortgage  is  all  safely 
pledged  and  that  there  are  no  flaws.  The  same  trust  com- 
pany, or  it  can  be  another,  acts  as  the  registrar  for  the 
bonds.  Its  duty  is  to  exercise  proper  supervision  that  not 
more  bonds  than  the  amount  called  for  by  the  mortgage 
are  issued.  The  bankers  who  have  taken  the  bonds,  pay 
to  the  tnist  company,  the  price  agreed  upon  anrl  have  the 
bonds  authenticated  by  the  registrars,  each  bond  being 
stamped,  or  there  is  engraved  upon  it  the  statement  that 
it  is  a  certain  fraction  of  a  number  of  fractions,  the  whole 


40  LOUIS  GUENTHER 

together  representing  the  amount  of  the  mortgage.  This 
is  to  prevent  an  over-issue.  The  full  terms  of  the  mortgage 
are  seldom  engraved  upon  a  bond.  They  are  usually 
printed  separately  in  the  sliape  of  a  pamphlet;  the  actual 
mortgage  is  tiled  with  the  trustee.  The  printed  copies  are 
for  the  pur^^ose  of  distribution  among  investors. 

Attached  to  the  bonds  are  small  coupons.  If  the  inter- 
est on  a  twenty-year  bond  is  made  payable  semi-annually 
on  tlie  first  day  of  January  and  July  and  is  at  the  rate  of 
5  per  cent  per  annum,  there  is  appended  to  each  $1,000 
bond,  40  separate  coupons,  each  stipulating  that  there  will 
be  paid  on  a  given  date,  at  a  certain  agreed-upon  place, 
the  sum  of  $25,  in  gold  nsually.  In  a  similar  manner  will 
the  principal  of  the  bond  be  paid  when  the  date  of  maturity 
is  reached.  All  that  is  required  of  the  holder  of  the  bond 
is  to  clip  off  these  coupons  as  they  fall  due  and  deposit  them 
with  his  bank  for  collection,  or  he  can  present  them  in  per- 
son, or  request  that  pa^inent  be  made  by  sending  in  the 
coupons.  To  make  it  as  convenient  as  possible  for  bond- 
holders, these  bonds  may  be  registered  with  the  corpora- 
tions issuing  them;  that  is,  the  bonds  can  be  left  in  their 
custody,  with  the  name  and  address  of  the  person  to  whom 
checks  foi-  the  interest  and  principal  should  be  mailed. 
Most  bonds  are  made  out  to  the  bearer.  This  is  done  to 
make  possible  their  speedy  sale  and  transfer.  Therefore, 
in  case  they  are  lost  or  stolen  and  fall  into  a  third  or  in- 
nocent person's  possession,  the  loss  will  fall  upon  the  origi- 
nal owner.  To  safeguard  against  such  an  event,  timid  in- 
vestors and  trustees  of  estates  quite  often  register  their 
bonds,  even  though  thev  ai-o  aware  that  their  securities, 
lacking  the  advantages  of  a  quick  transfer,  may  realize, 
if  sold,  a  fractiou  less  on  account  of  the  delav  in  deliverv, 
as  the  bonds  must  first  be  released  on  the  corporation's 
books.  As  the  interest  on  the  bouds  falls  due,  it  is  deposited 
with  the  bank  where  it  is  paid,  and  disbursed  as  the  cou- 
pons are  presented. 


INVESTMENTS  AND  SPECULATION  41 

"While  it  might  seem,  in  dealing  in  large  amonnts,  that 
there  nuist  necessarily  be  some  confusion,  this  mechanism 
devised  by  modern  finance  in  handling  large  loans  is  very 
simple  in  its  operations. 

The  confusion  regarding  bonds,  consequently,  is  not 
in  their  method  of  issuance  or  in  their  manner  of  payment. 
It  is  in  determining  the  collateral  securing  them  that 
counts.  Here  is  where  the  investor  must  exercise  precau- 
tion. Often  his  power  of  judgment  must  be  developed  to 
a  very  high  degree.  Essentially  one  factor  must  be  deter- 
mined by  bondholders  for  their  protection,  and  it  concerns 
itself  wholly  with  the  equity  existing  behind  the  loan. 

In  the  process  of  making  the  simplest  loan,  no  one  will, 
for  one  moment,  think  of  accepting  for  security,  any  pledge 
wliich,  in  the  event  a  borrower  cannot  meet  his  obligation 
will  not,  if  sold,  realize  at  once  the  face  of  the  loan,  to- 
gether with  all  accumulated  interest  and  all  the  expense 
caused  by  the  legal  enforcement  of  its  payment.  It  is  nec- 
essary, as  a  precautionary  measure  to  be  fortified  against 
all  possible  loss,  in  the  event  of  a  default  on  the  part  of 
the  borrower,  whether  it  is  for  interest  or  the  pa^Tiient  of 
the  principal,  to  exact  a  certain  marketable  value  in  excess 
of  the  loan.  Tliis  is  what  is  referred  to  in  financial  circles 
as  the  equity. 

By  the  same  yard-stick,  investors  should  measure 
bonds,  since  the  smaller  the  equity  the  more  speculative 
in  chai'acter  is  a  bond  and  in  tuni  a  better  income  should  it 
\ield  for  the  larger  risk  the  holder  must  assume.  Bond- 
holders are  creditors  of  a  corporation.  Tlioy  are  unlike 
stockholders,  who  divide  what  ]n'ofits  arc  made.  They 
merely  lend  their  cajiital  in  return  for  a  fixed  interest,  and 
ought,  by  the  very  nature  of  their  position  as  creditors,  to 
be  am])ly  secured  against  any  and  all  stressful  business 
weather  a  cor})orati<>n  may  meet.  For  that  very  reason 
the  collateral  pledged  behind  bonds  ou'iht  at  all  times  to  be 
subjected  to  the  most  exacting  investigation. 


42  LOUIS  GUENTHER 

As  has  been  previously  stated,  there  are  first,  second, 
third  and  even  fourth  nioi-tgage  bonds,  back  of  which  there 
is  pk'dged  the  same  j^roperty.  The  first  mort.c:ap:e  bond, 
quite  naturally,  is  the  prime  investment,  yet  from  a  point 
of  securitv,  this  does  not  alwavs  indicate  that  second,  third 
or  even  fourth  mort,G:a,2;e  bonds  are  not  also  safe  invest- 
ments. These  different  degrees  of  direct  mortgage  Ijonds 
are  most  frequently  found  issued  by  our  large  railroads. 
This  is  due  to  the  fact  that  the  property  underlying  the 
first  mortgage  bonds  has  multiplied  in  value  so  fast  as  to 
have  accunuilated  an  equity  sufficiently  large  enough  to 
allow  in  perfect  safety  the  creation  of  second  and  subse- 
quent mortgage  bonds. 

The  Erie  Railroad  is  an  illustration.  This  immense 
railroad  system  has  issued  as  many  as  five  first  mortgage 
bonds  against  the  same  property,  namely:  The  first,  4  per 
cent  bonds,  which  matured  in  1907;  the  second,  5  per  cent 
bonds  due  in  1919;  the  third,  4 J  per  cent  bonds  due  1923; 
the  fourth,  5  per  cent  bonds  due  1929;  and  the  fifth,  4  per 
cent  bonds  due  1928.  In  citing  the  Erie  Railroad  as  an 
illustration,  I  do  not  want  it  understood  that  I  use  it  as 
expressing  my  opinion  that  these  several  first  mortgage 
bonds  are  examples  of  the  safest  type  of  investments. 
Other  railroads  have  not  been  as  explicit  in  properly  cata- 
loging their  bond  issues  as  has  the  Erie,  and  this  has  re- 
sulted in  nmch  confusion  to  the  average  investor,  who,  as 
he  reads  of  a  first  mortgage  bond,  is  most  likely  to  assume 
without  further  inquiry  that  it  is  as  described  literally,  a 
first  mortgage  without  any  incuni])rance  ahead  of  it.  1  low- 
ever,  such  is  not  always  the  case.  ri)on  reading  the  de- 
scription of  the  bond  more  closely,  the  investor  is  likely 
to  run  across  something  like  the  following  which  is  the 
exact  phrasing  taken  from  a  well-known  first  mortgage 
railroad  bond: 

The  authorized  issue  of  first  mortgage  5  per  cent  bonds  is  $3.ooo,non,  the 
unissued  $120,000  being  reserved  for  the  retirement  of  the bridge  bonds. 

Analyze  the  above  paragraph  carefully  and  its  mean- 


INVESTMENTS  AND  SPECULATION  43 

ing  will  become  clear.  These  bonds,  altlioiigli  called  lirst 
mortgage  bonds,  are  not  exactly  that.  There  is  a  security 
ahead  of  them  in  these  bridge  bonds  which  must  first  be 
satisfied.  Without  the  bridge,  the  railroad  would  ])e  cut  in 
two  parts  like  a  dismembered  body. 

Here  again  is  another  description  of  a  fii'st  mortgage 
bond  which  will  cast  further  light  on  this  important  point 
and  concerns  a  first  mortgage  6  x^er  cent  railroad  bond. 

Amount  authorized  is  $6,000,000;  issued  $2,788,000,  of  which  $1,288,000 
was  in  exchange  for  prior  lien  bonds. 

To  be  exact,  what  this  means  is  that  there  are  ahead 
of  the  first  mortgage  6  per  cent  bonds,  other  bonds  al- 
ready in  existence  and  issued  against  a  mortgage  for  $1,- 
288,000  and  out  of  the  new  $6,000,000  first  mortgage  bonds, 
enough  bonds  have  been  reserved  in  the  treasury  to  re- 
place the  already  existing  bonds  when  they  fall  due. 

Xo  bonds  can  be  called  for  payment  unless  there  is  such 
a  stipulation.  Our  early  railroad  builders  never  expected 
to  witness  such  a  ra]3id  expansion  in  value  in  their  proper- 
ties as  occurred  in  their  lifetime,  for,  otherwise,  they  would 
have  made  some  provision  to  cancel  their  first  mortgage 
bonds  earlier  than  the  full  term  of  the  loan  so  as  to  leave 
their  ])ath  clear  of  obstructions  to  raise  additional  money 
as  the  growth  of  their  railroads  required  it. 

Only  a  few  years  ago  some  of  the  Chicago  &  North- 
Western  first  mortgage  7  per  cent  bonds  matured.  This 
premier  railroad  system  created  these  bonds  Avhen  the 
West  was  still  young,  and  at  a  time  when  it  was  not  as  easy 
to  borrow  money  as  now,  and  the  builders  of  this  great 
system,  not  to  burden  it  for  a  long  term  of  years  with  re- 
payment of  the  money  for  its  construction,  imagined  they 
were  driving  a  shrewd  financial  bargain  when  they  made 
these  bonds  payable  in  forty  and  fifty  years.  But  they 
seriously  erred.  Long  before  these  bonds  reached  their 
date  of  maturity,  the  Chicago  &  Xorth-Western  was  a))le 
to  borrow  whatever  money  was  required  to  finance  all  im- 


44  LOUIS  GUENTHER 

pruvuments  and  extensions  witli  l)<»nds  l)eann,c:  even  as  low 
an  interest  rate  as  3^  per  cent,  and  what  would  have  been 
even  a  greater  revelation  to  the  founders  of  this  property, 
had  they  lived,  would  have  been  the  fact  that  these  low  in- 
terest-bearing bonds  brought  par,  whereas  in  their  day,  to 
make  their  7  per  cent  bonds  attractive,  they  were  forced 
to  offer  them  at  a  considerable  discount. 

This  hard  lesson  of  our  earlier  financing  of  our  rail- 
roads has  never  since  been  neglected.  Now,  when  a  rail- 
road or  any  corporation  pledges  any  of  its  property  as  se- 
curity foi'  a  bond  issue  and  anticipates  in  the  course  of 
time  that  the  property  will  enhance  greatly  in  value  or 
the  opportunity  may  arise  to  borrow  money  ni(»re  cheap- 
ly, it  provides  for  such  eventualities  by  stipulating  in  the 
mortgage  the  privilege  of  calling  in  the  bonds  for  ])ayment, 
on  any  given  interest  date,  usually  at  a  premium  of  from 
5  to  10  per  cent.  We  often  come  across  the  term  in  a  bond 
callable  on  any  interest  day  on  so  many  weeks'  previous 
notice  at  a  certain  price  with  accrued  interest,  accrued 
meaning  the  interest  due  for  the  period  l)etween  the  last 
(late  when  interest  has  been  paid  to  the  date  when  pa^^nent 
ill  full  for  the  bonds  is  to  be  made. 

A  reduction  of  J  per  cent  in  interest  on  a  largo  amount 
(if  money  represents  a  tidy  annual  sum  saved.  Shrewd 
financiers  fully  i-calize  this.  Because  of  their  increased 
credit  and  value  of  their  property,  a  good  many  of  our  rail- 
roads could,  in  the  course  of  years,  have  effected  the  saving 
of  man\'  millions  of  dollars  by  a  ('h(»a]K'r  rate  of  interest, 
had  they  been  in  the  position  to  call  their  early  bonds  is- 
sued at  a  high  rate  of  interest.  They  had  to  allow  them  to 
rim  out  their  term  of  issue. 

"What  a  multiplicity  of  all  sorts  and  types  of  bonds 
there  is  now  in  existence  may  be  judged  from  a  partial 
list  here  compiled.  There  are  government  bonds,  state  and 
municipal,  under  which  latter  term  there  is  a  varied  as- 
sortment, such  as  direct  obligations  of  the  city,  tax,  drain- 


INVESTMENTS  AND  SPECULATION  45 

age,  pavcmeut,  road,  highway,  improvement,  lightius:,  gas, 
water,  assessment,  boulevard,  etc.;  there  are  the  first  mort- 
gage railroad  and  corporation  bonds  already  described, 
and  mortgage  bonds  following  in  sequence  in  regard  to  se- 
curity; there  are  consolidated,  extension,  income,  refund- 
ing, general,  construction,  terminal,  im]U'ovement,  divi- 
sional, equipment,  convertible,  collateral,  lien,  series,  guar- 
anteed, coal,  tim])er,  bridge,  tunnel,  vessel,  debenture,  par- 
ticipating, ])urchased  line,  unified,  branch  line,  joint, 
stamped,  adjustable,  land  grant,  canal,  loan,  underlying, 
redeemable,  reorganization,  tax  exempt,  purchase  money, 
sinking  fund,  convertible  debenture,  and  real  estate  bonds 
and  many  other  kinds.  Besides  these  there  are  trust  re- 
ceipt certificates  and  short  term  notes. 

When  the  investor  arrays  all  these  bonds  before  his 
mental  vision,  he  will  understand  the  full  meaning  of  the 
multiplicity  and  complexity  of  bonds,  which  has  resulted 
from  the  swift  evolution  in  our  modern  finance.  He  will 
appreciate  that  a  trained  mind  is  necessary  to  judge  the 
intrinsic  value  there  is  behind  all  these  different  names 
given  to  bonds  in  this  modern  day,  and  he  will  also  realize 
how  a  clever  financier,  undei"  the  guise  of  a  bond,  can  dis- 
pose of  a  security  which  in  all  reality  is  no  more  a  bond, 
in  the  true  sense  of  the  term,  than  is  the  paper  on  which 
this  is  printed. 


TX.     nOVERNMENT,   STATE  AND  Air^XirTPAL 

IJOXDS. 

Bonds  issued  l)y  govcriiniciits,  states  and  inuiiieipalitios 
are  in  a  distinet  elass  of  their  own.  The  vast  majority  of 
these  seeurities  have  no  other  pledge  behind  them  than  the 
credit  of  the  nation  or  the  comnnmity  issuing  them.  Still 
they  are  looked  npon  as  very  desirable  investments  when 
representing  the  obligations  of  a  prosperous  people.  There 
are  some  circumstances,  however,  under  which  bonds  of 
tliis  type  are  not  attractive  to  the  individual  investor,  from 
a  viewpoint  of  income. 

Take  our  own  government  l)onds,  for  exami)le.  The 
great  bidk  of  them  are  owned  by  our  national  banks  and 
only  a  small  proportion  by  investors,  considering  the  many 
millions  of  them  that  have  1)een  issued.  If  tliey  are  held 
at  all  bv  investors  or  estates,  it  is  not  because  of  the  in- 
terest  yield,  ])ut  on  account  of  the  assurance  of  their  ab- 
solute safety. 

ft' 

Our  national  bank  act  makes  it  compulsory  with  a  na- 
tional 1)ank,  before  it  can  issue  any  bank  notes,  to  deposit 
with  the  United  States  Treasurer,  an  e(iuivalent  amount  of 
government  bonds  to  secure  tlie  ]iayment  of  these  notes. 
You  have  no  (loul)t  often  noticed  a  paper  bank  note  on 
the  face  of  which  was  engraved  the  name  of  a  national  l)ank 
and  signed  by  the  bank's  president  and  cashier.  Well,  it 
is  these  notes  which  are  thus  secured  by  the  de]iosit  of  gov- 
ernment l)onds.     Insolvency  mav  overtake  the  bank,  l)ut 

ft-  • 

the  notes  are  alwavs  secured  bv  ii:()vernment  bonds  de- 
posited  in  the  United  States  Treasury.  When  a  bank  wishes 
to  reduce  its  outstanding  bank  notes,  all  it  does  is  to  col- 
lect a  sufficient  mnnber  of  national  bank  notes  and  tender 
them  to  the  Treasurer  of  the  Ignited  States,  upon  which 

46 


INVESTMENTS  AND  SPECULATION  47 

tho  oquivalent  aiiKniiit  in  l)onds  is  released.  It  is  not 
necessary  to  tender  the  notes  of  the  tendering-  bank;  any 
other  bank  notes  are  equally  acceptable.  This  is  done  to 
facilitate  their  issuance  and  cancellation. 

As  a  result  of  this  national  banking  act,  there  has  arisen 
a  broad  market  and  a  constant  demand  for  our  government 
bonds,  a  demand  created  by  an  artificial  market  which  has 
made  it  possible  for  our  Government  to  raise  all  the  money 
it  needs  to  provide  for  its  fiscal  requirements  on  a  2  per 
cent  and  3  per  cent  basis  and  still  place  its  securities  at  a 
premium.  The  national  banks  find  it  profitable  to  pay  this 
premium,  for  they  secure  a  small  income  on  the  bonds  after 
paying  the  tax  and,  with  the  notes  they  can  issue,  earn  addi- 
tional interest  by  lending  this  money  out  to  customers. 
Without  entering  into  the  details  of  this  operation,  in  which 
investors  are  not  interested,  it  can  be  readily  seen  why  it 
is  with  the  many  national  banks  in  existence  that  our  na- 
tion's bonds  bring  such  high  prices,  notwithstanding  they 
bear  a  low  rate  of  interest. 

In  England,  the  govenmient  bonds  are  knoT^ni  as  con- 
sols.    This  name  was  derived  from  an  act  of  the  British 
Parliament  consolidating  the  public  debt  and  the  word  is 
an  abbreviation  of  consolidated.    English  consols,  until  re- 
cently, commanded  a  price  realizing  slightly  over  2  per 
cent,  but  they  have  steadily  fallen,  since  there  has  not  been 
the  artificial  market  for  them  as  is  the  case  in  the  United 
S^tates  with  its  national  debt  bonds.    The  banking  system 
in  Great  "Britain  is  also  differently  organized.    There  the 
note-issuing  power  is  concentrated  in  a  central  bank,  the 
Bank  of  England.     For  a  time,  however,  English  consols 
were  under  an  artificial  stinuilus  through  the  adoption  of 
a  postal  bank  system  which,  by  enactment  of  Parliament, 
could  only  invest  deposits  in  British  consols.    As  deposits 
fall  off,  so  does  the  market,  for  the  Govenunent's  securi- 
ties narrow,  at  least,  the  artificial  market  provided  by  law. 
Still,  even  with  the  decline  which  has  occuiTcd  and  which 


48  LOUIS  GUENTHER 

at  one  time  brought  the  price  down  below  a  figure  not  wit- 
nessed since  1848,  consols  still  yield  less  than  3  per  cent, 
indicating  that  the  staid  British  investor  values  very  high- 
ly the  credit  of  his  nation  and  is  perfectly  content  with  an 
income  ranging  between  2i  and  3  per  cent. 

In  like  mainici-  does  the  French  jx'asant  investor  ap- 
])reciate  the  CJovcrnnient  Rentes,  as  the  Frendi  Uovem- 
ment  securities  are  called;  the  Gennan,  his  government  ob- 
ligation; and  equally  so  the  people  of  other  prosperous  na- 
tions favor  their  own  national  securities.  However,  not 
all  governments  can  borrow  money  on  their  credit  as  cheap- 
1}^  as  the  stronger  powers.  Credit  with  them  varies,  as  it 
does  with  individuals.  Some  of  the  smaller  nations  are 
forced  to  pay  as  high  as  6  per  cent  for  loans  and  besides 
they  not  infrequently  allow  the  underwriting  bankers  who 
take  the  loan  and  agree  to  place  the  bonds,  a  discount  for 
their  services.  Some  of  the  minor  countries,  where  there 
is  turbulence  and  internal  strife  constantly,  cannot  even 
borrow  money  unless  at  usurious  rate  of  interest,  because 
they  have  no  stability  to  offer  as  a  reassurance  that  their 
l(tans  will  not  be  repudiated. 

It  cost  Japan  almost  6  ])er  cent  on  its  loans  to  finance 
its  war  with  Russia.  The  Cuban  Government  had  to  ]iay 
the  same  rate.  Even  Russia,  although  known  to  have  col- 
lected the  largest  reserve  in  gold  owned  by  any  Kuro])ean 
power,  found  it  necessary,  when  in  confiict  with  Ja})an,  to 
tempt  bankers  and  investors  with  a  high  interest  rate  be- 
fore thev  would  take  its  securities.  The  bonds  issued  bv 
the  governments  of  the  Argentine  Rei)ubli(',  Brazil,  Chile, 
Bolivia,  Honduras  and  other  South  American  Republics 
can  be  had  on  a  basis  close  to  6  per  cent.  This  does  not  at 
all  refiect  upon  them;  it  merely  fixes  the  position  of  their 
credit  in  the  money  capitals  of  the  world.  As  their  <'redit 
enhances  they  will  l)e  in  a  j^osition  to  refund  their  out- 
standing loans  on  a  lower  interest  basis.  Mexico  did  this 
a  short  time  ago.    That  country  i)laced  a  gold  loan  some 


INVESTMENTS  AND  SPECULATION  49 

years  ago  on  a  4i  per  cent  interest  basis.  The  country's 
credit  has  increased  to  a  point  where  it  was  found  possible 
to  replace  these  4A  per  cent  bonds  with  a  4  per  cent  bond, 
thus  effecting  quite  a  saving  in  fixed  charges  to  the  Gov- 
ernment. 

The  interest  government  obligations  call  for  is  usually 
provided  by  the  proceeds  from  taxation,  external  or  inter- 
nal. Some  countries  place  a  tax  on  certain  widely  used 
commodities  and  set  the  revenue  aside  for  the  payment  of 
interest  on  the  public  debt.  In  no  other  way,  except  in  iso- 
lated instances,  are  government  bonds  secured.  Should  a 
government  debt  be  repudiated,  its  payment  by  the  holders 
of  its  obligations  could  not  be  enforced  by  recourse  to  law. 
The  reason  is  that  a  government  cannot  be  sued,  since  it  is 
not  amenable  to  the  statutes  of  any  other  government,  while 
its  own  people  cannot  recover  from  the  institution  they 
themselves  have  created  and  whose  laws  to  govern  them 
thev  have  enacted. 

In  our  own  countrv  the  freedom  of  the  Government  from 
any  civil  action  even  goes  so  far  as  to  exempt  the  states. 
South  Carolina  repudiated  some  of  the  bonds  issued  during 
the  reconstruction  days  and  neither  the  interest  nor  the 
principal  has  ever  been  paid.  Nor  can  the  holders  enforce 
payment.  Some  of  the  bondholders  have  attempted,  and 
so  far  have  succeeded,  in  getting  a  number  of  these  bonds 
in  the  possession  of  another  state,  because  one  state  can 
l)ring  legal  action  against  another  to  recover  on  a  disputed 
claim.  South  Dakota  did  sue  South  Carolina  in  the  United 
States  Supreme  Court  to  enforce  the  payment  of  these 
bonds  and  recovered  judgment,  ])ut  even  then  a  state  can- 
not collect,  as  it  cannot  attach  the  property  or  revenues  of 
another  state  and  certainly  cannot  take  up  arms  against  it 
to  make  it  pay.  In  the  end  such  matters  must  be  left  to  the 
honor  of  a  state  for  settlement.  Fortunately,  with  our 
country,  instances  of  repudiation  of  public  debts  are  very 
rare.    Only  in  isolated  cases  has  it  ever  occurred. 

B.VII— 4 


50  LOUIS  GUENTHER 

TLiL'  iiu-aiLs  till'  (Jowriinu'iit  atl(>i)ts  to  raise  niuiiey  are 
followed  on  a  smaller  scale  by  the  forty-eicjht  separate 
states.  They  have  uses  for  funds  likewise.  Improvements 
in  the  his^lnvavs  are  a  constant  necessitv.  There  are  the 
public  buildings  to  provide  for.  The  needs  of  other  im- 
provements benefiting  the  people  of  the  state  are  constant- 
ly arising.  To  provide  the  funds  by  direct  taxation  would 
prove  to  be  too  burdensome  and  also  is  it  unjust  to  force 
one  generation  to  share  the  whole  burden  of  financing  some 
public  undertaking,  the  advantage  of  which  will  be  partic- 
ipated in  hy  generations  to  come.  The  theory  is,  and  it 
is  a  very  good  theory,  that  such  debts  should  be  divided 
equally  and  this  is  accomplished  by  issuing  bonds  running 
for  a  long  term  of  years  and  carrying  a  fixed  rate  of  inter- 
est. As  these  bonds  are  authorized,  the  state,  usually 
through  its  elective  officer,  the  State  Treasurer,  invites  bids 
for  them  and  disj^oses  of  the  bonds  to  the  highest  ])idders. 

The  privilege  of  bidding  for  such  bonds  is  not  restricted. 
The  humblest  investor  can  make  an  offer  and  if  it  is  among 
the  successful  tenders  when  the  bonds  are  allotted  to  the 
highest  bidders,  he  will  obtain  the  bonds  to  the  amount  of 
his  bid  if  there  are  enough  to  go  around.  There  is  one  re- 
striction, though,  which  has  been  adopted  as  a  general  ju-ac- 
tice  to  guarantee  that  the  bonds  will  be  taken  by  the  suc- 
cessful bidders  or  bidder,  and  this  is  that  a  certified  check 
for  a  nominal  per  cent  must  accompany  the  bids  as  a  guar- 
antee of  good  faith. 

How  unjust  it  would  be  to  have  one  generation  carry 
the  entire  burden  of  an  imi)ortant  i)iil)lic  improvement,  can 
best  be  illustrated  Ity  the  improvement  and  electrification 
of  that  great  highway  of  commerce,  the  Erie  Canal,  by  the 
State  of  New  York.  It  is  estimated  that  this  work  will 
cost  about  $100,000,000  and  to  provide  the  funds,  the  legis- 
lature, a  short  time  ago,  authorized  a  state  bond  issue  to 
the  amount  authorized  as  the  work  progresses.  Posterity 
will  derive  greater  benefit  from  this  vast  undertaking  than 


INVESTMENTS  AND  SPECULATION  51 

will  the  present  generation.  Some  states  whose  credit  is 
excellent,  fix  by  statute  the  interest  rate  and  even  the  price 
which  must  be  realized  for  whatever  bonds  the  legislature 
authorizes.  But  this  is  not  always  an  advantage.  Capital 
may  not  be  so  available  as  to  be  attracted  by  a  low  rate  of 
interest,  and  if  this  is  true,  we  witness  the  failure  of  a  bond 
issue,  because  there  are  not  sufficient  bids  for  it.  This  has 
even  happened  with  New  York  State,  rich  as  it  is.  The 
state,  in  nonnal  periods,  experiences  no  difficulty  in  getting 
all  the  money  for  its  requirements  with  a  3  per  cent  bond. 
Furthennore,  bankers  and  investors  bid  eagerly  for  the 
bonds  at  a  premium  over  the  price  fixed  by  law,  at  which 
they  may  be  sold.  But  during  the  depression  following 
the  1907  panic,  there  was  a  time  when  the  State  Treasurer 
was  compelled,  because  of  the  failure  of  bids,  to  come  with- 
in the  state  law's  requirements  to  purchase  an  issue  of 
bonds  with  the  available  cash  in  the  state's  sinking  funds. 
The  line  of  demarcation  in  credit  is  as  pronounced  with 
states  as  it  is  in  individuals.  The  far  western  and  sparse- 
ly settled  states  are  forced  to  pay  larger  interest  to  tempt 
capital.  Thus  you  see  that  capital  is  a  ruler  whose  power 
is  supreme. 

Counties,  large  cities  and  small  municipalities  borrow 
money  on  much  the  same  lines  of  financing  as  are  followed 
by  the  states  and  general  government.  Here  and  there  va- 
rious restrictions  exist  but  in  general  they  follow  the  same 
plan  of  raising  funds.  To  prevent  the  cities  from  over- 
borrowing,  some  states,  and  for  that  matter  most  of  them, 
have  wisely  fixed  a  limit.  For  example,  no  city  in  the  ma- 
jority of  eastern  states  can  legally  authorize  more  bonds 
than  will  equal  10  per  cent  of  the  assessed  valuation  of  the 
taxable  property,  and  when  it  has  reached  this  figure,  it 
must  wait  until  there  has  been  an  increase  m  the  value  of 
the  assessable  properties  to  permit  adding  to  the  public 
debt.  This  is  a  wise  provision,  as  it  acts  as  a  safeguard 
against  creating  an  indebtedness  beyond  the  ability  of  the 


52  LOUIS  GUENTHER  . 

population  to  comfortably  carry.  Such  -feaels  are  also 
disposed  of  by  inviting  public  bids,  -wbich  bids,  by  law, 
must  be  advertised.  To  give  a  distinct  identity  to  these 
bonds,  they  are  usually  named  after  the  purpose  for  which 
thev  are  issued. 

A  city  may  decide  on  making  some  street  improvements; 
therefore  bonds  are  authorized  for  this  purpose  and  desig- 
nated as  street  improvement  bonds  or  they  may  be  court- 
house or  school  bonds,  highway  bonds,  grading  bonds,  etc. 
Therefore  the  character  of  a  county,  city  or  a  municipal 
bond  may  be  determined  by  the  name  employed  to  distin- 
guish it  from  other  bonds  authorized  by  the  same  com- 
munity. My  space  is  too  limited  to  go  into  all  the  details 
governing  the  many  thousands  of  such  obligations  which 
have  come  into  existence.  I  can  only  refer  to  them  gen- 
erally and  in  the  broadest  light.  For  instance,  Xew  York 
City  has  a  public  debt  in  excess  of  $800,000,000,  all  of  which 
is  represented  by  a  great  many  classes  of  designated  bonds. 
New  York  Citv  is  a  steadv  borrower.  It  needs  monev  for 
docks,  for  subways,  for  boulevards  and  many  other  mani- 
fold forms  of  public  improvements.  Some  of  these  bonds 
earn  their  own  interQst  charges;  for  that  reason  they  are 
not  a  burden  on  the  taxpayers.  This  is  the  case  with  the 
bonds  authorized  to  raise  the  money  to  build  the  subway 
or  furnish  undergrouncL  rapid  transit  facilities.  Likewise 
with  the  bonds  issued  to  build  the  large  water  front  piers 
owned  by  the  city  and  rented  to  the  steamship  lines.  The 
interest  on  other  bonds  is  provided  by  taxation  of  the  prop- 
erty owners  who  are  the  direct  beneficiaries  of  the  improve- 
ments. 

It  must  be  anticipated  that  where  there  is  such  a  mul- 
titude of  communities,  small  and  large,  there  will  arise 
many  complications  in  determining  the  character  of  their 
securities  as  investments.  As  a  result,  also,  there  will  be 
a  wide  range  in  their  income  yield.  The  business  done  in 
such  obligations  reaches  enormous  totals.    It  would  prove 


INVESTMENTS  AND  SPECULATION  53 

highly  interesting  if  it  were  possible  to  describe  in  one 
section  a  subject  which  could  only  be  adequately  dealt  with 
in  a  whole  book — the  care  that  must  be  exercised  by  bankers 
who  make  a  specialty  of  dealing  in  municij^al  obligations. 
Before  bidding  for  these  bonds,  such  houses,  through  their 
attorneys,  first  assure  themselves  that  the  bonds  have  been 
legally  issued,  by  which  is  meant  that  the  electors  authoriz- 
ing the  bonds  were  within  the  law.  They  must,  in  instances 
where  even  the  lec'alitv  of  the  issue  is  not  in  doubt,  satisfy 
themselves  that  the  conununitv  can  meet  the  taxation  to 
pay  for  the  issue.  Infrequently  this  is  the  case:  A  grow- 
ing settlement,  in  its  ambition  to  anticipate  the  future  too 
far  ahead,  may  rashly  bite  off  more  than  it  can  masticate, 
and  as  a  result,  complications  arise.  Dealers  in  municipal 
bonds  wish  to  avoid  this  possible  danger  even  when  it  is  a 
remote  contingencv.  Monev  is  a  hard  taskmaster.  It  has 
no  sympathies.  However,  considering  the  total  obligations 
of  the  multitude  of  our  United  States  communities,  esti- 
mated in  the  neighborhood  of  $10,000,000,000,  they  have 
had  such  an  unusually  satisfactory  record  as  safe  invest- 
ments that  investors  need  no  other  reassurance  from  the 
bankers  than  that  their  legality  is  beyond  question  and  the 
amount  of  the  issue  is  within  reasonable  bounds. 


X.    THE  AMAZTXn   X'ArMKTV  OF  KATLHOAD 

BONDS. 

Til  tlic  issuance  of  bonds,  onr  railroads  have  been  very 
prolific.  Xot  only  are  they  possessed  of  an  insatiable  a])- 
petite  for  continuous  sui)})lies  of  new  capital,  sometimes 
for  the  logical  jnirpose  to  provide  for  legitimate  needs,  and 
on  other  occasions  to  satisfy  the  desire  for  new  worlds  to 
conquer,  but,  to  give  their  bonds  suitable  names,  the  makers 
have  almost  exhausted  the  financial  vocabulary. 

The  average  investor,  unless  thoroughly  acquainted 
with  the  difference  in  bonds,  Avill  nowadays  need  a  financial 
text-book  to  distinguish  one  railroad  bond  from  another, 
and  even  then  he  may  not  be  in  a  position  to  judge  their 
relative  and  intrinsic  values.  There  are  so  many  different 
bonds  as  to  recall  the  57  different  varieties  of  pickles  made 
commercially  famous  by  a  certain  purveyor  of  condiments. 
While  there  are  not  exactlv  that  manv  different  kinds  of 
bonds,  the  total  is  dangerously  near  the  number. 

Still  the  railroads  are  not  wholly  to  blame  for  this  sit- 
uation. As  has  been  pointed  out  in  a  previous  section,  the 
early  builders  of  our  railroads  never,  for  one  moment, 
thought  their  properties  would  ever  grow  with  the  giant 
strides  that  have  characterized  their  progress.  Early  in 
their  history,  by  erring  on  the  side  of  conservatism,  in 
pledging  all  their  assets  as  collateral  for  loans,  which  is  all 
])onds  really  represent,  thoy  made  it  iiii]-»ossiblo  in  aftc^r- 
years  to  directly  mortgage  their  ]>ro])erti(\*=^  over  again. 
Thus  they  were  com])elled  to  resort  to  other  devices  when 
it  became  necessarv  to  borrow  more  monev,  and  this  ac- 
counts  for  the  many  varieties  of  bonds  they  have  created. 
The  earliest  railroad  bond  was  the  first  mortgage  bond. 
Down  to  this  day  it  is  the  leader  among  tlu^  best  of  bonds, 

64 


INVESTMENTS  AND  SPECULATION  55 

a  fact  that  is  firmly  established  by  the  rehitively  small  in- 
come it  yields,  compared  to  other  bonds  issued  by  the 
same  railroad.  As  tliey  possess  the  first  legal  rights  to  the 
assets  of  the  road  in  the  event  of  financial  embarrassment, 
the  security  is  usually  accepted  as  an  absolute  guarantee 
of  the  safety  of  the  funds  invested. 

Of  course,  this  does  not  api)ly  to  all  first  mortgage  rail- 
road bonds— onl}^  to  the  old-established  properties.  Again, 
a  first  mortii'aire  railroad  bond  does  not  necessarilv  mean 
that  it  is  the  first  lien  on  all  the  property.  The  mortgage 
may  be  on  only  such  property  j^ledged  under  the  mortgage 
as  is  especially  drawn  to  cover  that  particular  issue  of 
l)()nds.  A  large  trunk  line  may  have  outstanding  a  dozen 
or  more  first  mortgage  bonds,  each  bond  covering  a  i)art  of 
the  main  line,  and  not  infrequently,  branch  lines. 

Our  great  railroad  systems  are  not  the  result  of  the  orig- 
inal 2:)lans  of  their  first  builders;  these  men  may  have  had 
a  nebulous  idea,  at  the  beginning  of  their  project,  of  a  sys- 
tem from  coast  to  coast,  or  covering  a  certain  section  of  the 
country  under  their  control  with  a  gridiron  of  rails,  Init, 
realizing  all  this  would  take  time,  thev  contented  them- 
selves  with  building  their  road  in  sections,  allowing  the  fu- 
ture to  take  care  of  the  logical  development  of  their  prop- 
erty. 

While  Henry  Villard  planned  the  Xorthern  Pacific, 
other  brains  completed  it.  Ilarriman  merely  completed 
the  unfinished  Union  Pacific.  He  simply  moulded  his  great 
Pacific  railroads  out  of  what  remained  of  the  l)ankrupt 
Central  Pacific,  the  construction  of  which  the  Goveniment 
aided  by  large  sul)sidies.  TamoR  J.  TTill  never  had  any  idea, 
when,  for  a  small  sum  of  money,  he  secured  control  of  a 
jerkwater  ^linnesota  railroad,  that  eventually  it  would  de- 
velop into  that  marvelously  rich  transcontinental  railroad 
— the  Great  Northern  of  today. 

It  is  by  a  process  of  evolution  that  a  railroad's  capital 
obligations  gi'ow.     The  one  keeps  pace  with  the  other. 


56  LOUIS  GUENTHER 

Twenty  years  ago  it  never  entered  the  head  of  the  audacious 
and  far-sighted  Cassatt,  the  President  of  the  Pennsylvania 
Railroad,  at  the  time  when  the  road  determined  to  build  a 
terminus  in  New  York  City,  that  the  Long  Island  Railroad 
would  one  day  become  absolutely  necessary  for  its  expan- 
sion, as  has  since  proved  the  case,  for  the  control  of  the 
Long  Island  has  given  the  Pennsylvania  a  commanding 
position  over  the  greater  part  of  the  profitable  suburban 
traflfic  originating  out  of  New  York  City — a  business  which 
alone  is  regarded  as  capable  of  taking  care,  without  de- 
pending upon  the  other  revenues,  of  the  Pennsylvania's 
huge  investment  of  over  $100,000,000,  which  the  road  spent 
to  secure  a  foothold  in  Xew  York  City. 

If  the  histories  of  our  other  leading  railroads  were 
carefully  searched,  similai'  conditions  would  be  found 
where  the  roads  have  exjianded  in  entirely  different  direc- 
tions from  that  planned  by  their  original  builders.  Their 
remarkable  and  ra}tid  development  has  brought  witli  it 
quite  naturally  some  very  unusual  phases  of  financing.  The 
main  lines  of  all  the  principal  railroads,  through  the  enor- 
mous development  of  their  traffic,  long  ago  quickly  out- 
grew the  funds  raised  on  their  first  mortgage  bonds.  Then 
arose  the  necessity  of  providing  additional  capital  to  take 
care  of  the  increased  business  through  some  other  form 
of  bond  against  tlie  very  same  i)roperty,  although  there 
already  existed  liens  upon  it.  But  as  there  was  sufficient 
equity  above  the  mortgage,  tliis  st(*p  was  justified. 

A  clear  idea  regarding  the  several  classes  of  bonds  out- 
standing can  be  more  easilv  formed  bv  classifving  them 
and  giving  a  brief  description  of  each.  It  should  l->e  born^^ 
in  mind,  however,  that  these  definitions  are  not  specific, 
])ut  a]i}>ly  only  generally  to  each  class.  There  are  so  many 
peculiar  features  associated  with  railroad  bonds  that  it 
would  be  impossible  to  treat  specifically  of  each  issue  un- 
less the  bonds  of  each  railroad  were  described.  Such  a  task 
would  require  a  liook  more  tlian  twice  the  size  of  this 


INVESTMENTS  AND  SPECULATION  57 

volume.  For  that  reason  tlio  description  I  shall  give  of 
each,  I  feel  vriW  at  least  suffice  to  fix  its  character  in  the 
reader's  mind. 

The  consolidated  bond  is  a  bond  wherein  is  merged 
a  number  of  bonds  previously  issued.  A  railroad  may 
have  created  in  former  years  a  series  of  bonds  directly 
secured  by  its  physical  assets.  Some  of  those  bonds  may 
have  been  placed  when  interest  rates  were  high,  while 
the  other  bonds  were  sold  in  later  years  at  a  time 
when  it  was  much  easier  to  borrow  capital  than  at  the 
earlier  period.  The  railroads,  to  escape  this  situation, 
evolved  what  is  known  as  the  consolidated  bond.  This  was 
done  through  the  making  of  a  general,  or  what  is  styled, 
a  blanket  mortgage,  providing  that  amounts  of  such  con- 
solidated bonds  be  retained  by  the  road  to  equal  the  bonds 
already  outstanding  on  the  property,  so  as  to  replace  them 
when  they  fall  due.  In  this  manner  the  railroads  were  in 
a  position  to  obtain  additional  funds  without  pledging  ad- 
ditional collateral. 

Almost  similar  in  character  are  refunding  bonds. 
Originally,  they  sprang  into  existence  as  a  means  where- 
by the  railroads  could  refund  high  interest-bearing  bonds 
which,  when  the  road  was  first  building,  it  was  neces- 
sary to  sell  to  tempt  capital  into  the  project.  It  was 
tlio  i^i-actice  in  the  earlv  davs  of  railroad  buildino:  to 
make  a  loan  for  fiftv  vears.  Usuallv  the  interest  paid  was 
6  per  cent;  sometimes  it  was  as  high  as  7  per  cent.  What 
was  further  to  the  detriment  of  these  early  loans,  was  that 
no  callable  provisions  were  embodied  in  the  mortgage; 
therefore  these  bonds  had  to  run  until  their  expiration.  Al- 
most fifty  years  covers  the  longest  period  of  development 
in  our  steam  railroads.  Fifty  years  takes  us  back  to  the 
very  beginning  of  our  Civil  War,  a  period  when  the  con- 
struction of  railroads  was  still  in  its  earlv  stages.  In  con- 
sequence  there  has  matured  and  will  mature,  within  the 
next  decade,  a  number  of  these  earlv  issues  of  railroad 


58  LOUIS  GUENTHER 

bonds.  It  is  to  take  up  these  bonds  as  fast  as  they  mature, 
and  to  secure  additional  capital  as  found  necessary,  that 
refundiuLj  bonds  bearing  a  lower  rate  of  interest  have  been 
and  are  ))eing  issued. 

The  so-called  general  morfgafje  bond  may  or  may  not 
have  other  bonds  ahead  of  it,  but  more  often  it  will  be  found 
that  such  is  the  case.  The  purpose  behind  such  a  bond  issue 
is  to  have  some  day,  when  all  prior  lim  and  branch  line 
bonds  have  matured,  but  one  kind  nf  bond  outstanding. 
These  bonds  are  also  issued  in  large  amounts  to  provide  a 
railroad's  treasui'v  with  a  reserve  fund  in  secui'ities  on 
which  to  depend  for  additions  and  extensions  as  future  de- 
velopment may  demand. 

As  its  name  implies,  an  extension  bond  is  a  ])ond  created 
for  the  purpose  of  raising  funds  to  extend  the  railroad. 
Usually  the  extension  is  pledged  to  secure  the  bonds.  Such 
bonds  may  be  named  first  mortgage  extension  bonds,  or 
merely  extension  bonds.  A  divisional  bond  is  almost  exactly 
the  same,  it  being  an  obligation  of  a  division  on  a  railroad 
distinct  from  the  rest  of  the  system,  likewise  a  branrJi  line 
bond.    There  are  many  such  bonds  in  existence. 

Among  the  bonds  of  some  of  our  railroads  will  ])e  dis- 
covered what  are  called  unified  bonds,  meaning  a  bond 
created  to  unifv  in  one  issue  a  number  of  underlving  l)onds 
and  to  reduce  the  interest,  which  differs  on  the  several  is- 
sues, into  one  rate.  Other  railroads  will  call  a  bond  similar 
in  purpose  an  adjustable  bond,  implying  that  with  the  issue 
the  intention  has  been  to  adjust  the  bonded  debt  into  one 
class  and  have  one  given  interest  rate. 

A  lien  bond  denotes  the  obligation  in  accordance  with  its 
number  or  name,  as,  for  example,  a  first  lien  bond  is  really 
the  (lii-ect  mortgage  bond,  although  some  railroads  call  this 
particular  issue  a  prior  lien,  im]>lying  it  has  ]n-eferences 
over  all  other  liens  or  bonds  outstanding.  A  seeond  lien 
bond  is  like  a  second  mortgage.  A  third  lien  follows  in  se- 
quence and  so  forth.    Quite  naturally  it  may  be  assumed 


INVESTMENTS  AND  SPECULATION  59 

that  each  lien  bond  on  the  same  coHateral  has  behind  it  a 
lesser  degree  of  security  than  the  lien  ahead  of  it. 

Often  a  railroad  plans  improvements  on  a  certain  section 
of  the  road  already  covered  by  a  mortgage,  and  raises  the 
capital  by  selling  what  is  knovm  as  an  improvement  bond— 
a  bond  presumably  secured  by  the  improvements  contem- 
plated, although  in  reality  subject  to  bonds  already  in  exis- 
tence, inasmuch  as  the  improvements  can  have  little  value  if 
detached  from  the  underlying  structure. 

The  railroads  likewise  have  found  it  convenient,  when 
they  wish  to  exj^and,  to  acquire  other  roads.  This  is  often 
a  much  cheaj^er  method  than  to  construct  a  new  line  in  the 
same  territory.  This  has  brought  into  existence  what  are 
called  puvchnsc  line  bonds,  the  proceeds  of  which  enable  the 
railroad  to  secure  control  of  a  rival  of  a  feeder.  These 
bonds  usually  are  a  lien  on  the  acquired  road,  subject  some- 
times to  bonds  that  may  be  already  pledged  against  it. 
There  is  also  the  consfriiefion  bond,  a  security  issued  for 
capital  to  undertake  new  construction.  There  is  the  pur- 
chase money  bond,  akin  to  the  purchase  line  bond,  only  a 
little  broader  in  scope  in  that  it  may  mean  that  the  money 
can  be  used  to  purchase  something  else  than  another  road. 
There  is  the  tax  exempt  bond,  so  named  because  it  is  free 
from  taxation  bv  state  or  citv,  not  through  anv  legislative 
provision,  but  by  the  mere  fact  that  the  railroad  itself  has 
agreed  in  its  mortgage  to  take  care  of  all  the  taxes,  or  it 
may,  by  legislation,  be  freed  from  all  taxes  in  certain  states. 
Here  it  might  be  mentioned  that  in  some  states,  in  order  to 
increase  the  num])er  of  desirable  securities  into  which  the 
funds  of  its  savings  banks  ma\'  be  safely  invested,  tax-free 
provisions  are  held  otit  and  also  provisions  whei-eby  certain 
types  of  bonds  become  legal  for  investment  for  the  funds 
of  such  institutions.  This  explains  the  phrase  so  frequently 
occurring  in  the  circulars  of  bond  dealers:  "legal  invest- 
ments in  such  and  such  states."  Serial  bonds  are  like  lien 
bonds,  as,  for  example,  the  Chicago,  Milwaukee  &  St.  Paul 


60  LOUIS  GUENTHER 

general  mortgage  bonds.  The  total  issue  is  $39,978,  000,  and 
of  these  bonds  a  little  over  $31,000,000  comprise  the  Series 
A  bonds  and  the  remainder  are  the  Series  B  bonds.  A  rail- 
road finds  it  sometimes  convenient  to  split  a  large  bond  issue 
into  different  series  and  name  the  several  issues  in  this  man- 
ner to  c:ive  them  a  distinct  identitv  and  maturitv. 

The  terminal  bond  is  usuallv  secured  bv  the  main  station 
property  owned  by  a  road.  This  property,  consisting  of 
valuable  real  estate,  is  at  least  now-a-days  kept  distinct 
from  all  other  assets  and  used  as  a  collateral  to  secure  sep- 
arate loans.  This  idea  is  further  applied  to  other  prop- 
erty owTied  by  a  railroad,  not  directly  associated  with  its 
main  business,  as  in  the  case  of  the  road's  harbor  or  water 
business.  A  number  of  our  roads,  for  the  development  of 
this  traffic,  have  raised  money  for  the  purchase  of  ferry 
boats,  lighters,  vessels,  and  tug  boats,  all  of  which  it  pledges 
for  a  separate  loan,  and  each  bond  is  specified  under  a  sep- 
arate name  so  as  to  easily  distinguish  it.  Similar  is  the 
case  with  bridge  bonds,  directly  secured  by  certain  bridges 
a  road  has  built  to  span  certain  streams.  Tunnel  bonds  are 
issued  for  the  same  purpose. 

By  a  joint  bond  it  is  usually  inferred  that  the  bond 
is  jointly  associated  with  some  other  bond  in  a  partic- 
ular lien.  An  nnderlyinc)  bond  is  named  thus  to  dis- 
tinguish it  from  another  bond  on  the  same  pro]ierty.  A 
redeemable  bond  implies  that  the  issuing  company  re- 
serves the  privilege  of  calling  upon  the  holder  for  the  re- 
turn of  the  bond,  with  accrued  interest,  at  a  specified  price. 
There  are  also  issued  bv  the  railroads,  eanal  bonds,  timber 
bonds,  coal  bonds,  land  grant  bonds  and  so  forth,  each  is- 
sued against  particular  property,  and  in  many  instances 
they  are  valuable.  Take,  for  instance,  the  Reading, 
the  Lackawanna,  the  Delaware  &  Hudson,  the  Jersey  Cen- 
tral and  the  Lehigh  Valley;  their  coal  properties  are  among 
the  most  valuable  of  their  entire  assets,  as  on  the  other  hand 
are  the  land  grants  of  the  Southern  Pacific,  the  Union  Pa- 


INVESTMENTS  AND  SPECULATION  61 

cific  and  the  Canadian  Pacific.  The  land,  originally  granted 
these  roads  by  their  respective  governments  to  encourage 
their  development,  has  increased  enormously  in  value 
through  the  transportation  facilities  which  have  been  ac- 
corded them,  and  through  the  influx  of  population. 

There  is  also  what  is  styled  a  reorganization  bond,  an 
oblii;-ation  issued  at  the  time  when  a  financiallv  embar- 
rassed  railroad  was  reorganized  and  again  put  on  its  feet. 
There  is  the  sf  aw  peel  bond,  stamped  for  some  reason  or  other. 
This  is  a  rare  bond,  the  Atchison  being  one  of  the  very  few 
railroads  having  a  bond  of  this  description.  Then  there  is 
the  registered  bond,  taking  its  name  from  the  privilege  ac- 
corded the  holder  to  register  his  name  and  address  and  the 
amount  of  his  bonds  on  the  books  of  a  railroad  as  a  pro- 
tection against  loss  or  theft  of  his  bonds.  AVhen  this  is  done 
the  bonds  can  only  pass  from  one  holder  to  another  by  a 
transfer  on  the  books,  for  bonds  to  be  quickly  negotiable, 
are  made  out  simply  to  bearer. 

Sinking  fund  bonds  derive  the  name  from  a  provision 
that  the  issuing  company  agrees  to  redeem  each  year  a  spec- 
ified number  until  thev  are  all  automatically  retired.  Some- 
times  a  railroad  carries  the  redeemed  bonds  in  its  own 
treasury,  using  the  coupons  to  help  pay  the  interest  on  the 
outstanding  bonds,  or  it  may  agree  in  the  mortgage  to  set 
aside  each  year  a  certain  per  cent  of  the  earnings  as  a  sink- 
ing fund  to  automatically  retire  the  bonds  when  due,  the  in- 
terest on  this  money  helping  to  defray  the  interest  on  the 
bonds. 

There  are  also  guaranteed  railroad  bonds,  consisting 
of  bonds  of  controlled,  leased  or  absorbed  lines,  whose 
bonds  are  guaranteed  by  the  controlling  lines.  Sometimes 
these  bonds  are  guaranteed,  both  as  to  interest  and  princi- 
pal, meaning  that  if  there  is  a  default,  the  guarantor  will 
reimburse  the  holders  in  full.  Some  of  these  bonds  are 
guaranteed  only  as  to  interest,  as  in  the  case  of  the  bonds  of 
the  Western  Pacific,  the  interest  on  the  first  mortgage  5  per 


62  LOUIS  GUENTHER 

cent  ])()uds  being  gnarantccd  by  the  Dcnvei'  &  Rio  Grande, 
but  not  the  principal. 

A  class  of  railroad  bond  which  in  late  years  has  jumped 
into  great  poi)uharity,  is  the  equipment  bond.  Nearly  every 
railroad  has  one  or  more  such  issues,  some  of  the  larger 
roads  having  many.  These  bonds  are  secured  bv  the  rolling 
stock  consisting  of  locomotives,  passenger  coaches  and 
freight  cars.  It  can  easily  be  inferred  what  constitutes  their 
safety  in  the  opinion  of  investors  when  it  is  taken  into  ac- 
count that  without  equipment  a  railroad  is  useless  and  its 
tracks  would  soon  consist  of  two  streaks  of  rust. 

Railroads  have  gone  into  receivers'  hands,  suspending 
pa;^^nent  of  interest  on  a  portion,  if  not  all  of  their  bonds 
until  they  could  be  refinanced,  but  rarely  have  even  receivers 
avoided  paying  promptly  the  interest  on  equipment  bonds, 
realizing  the  absolute  necessity  of  retaining  the  equipment. 
Being  easily  moveable,  this  equi^unent  gives  the  bondholders 
a  conveniently  saleable  collateral  in  the  event  they  would 
have  to  take  it  over  to  satisfy  their  loan,  and  then  it  would 
not  be  possible  to  operate  the  road  unless  other  equipment 
w^as  purchased. 


XL    PUBLIC  SERVICE  BONDS. 

There  is  a  class  of  corporations  owing  their  existence 
to  special  privileges  granted  by  communities  to  furnish  a 
service  to  the  people,  pi'oviding  greater  comforts  and  mak- 
ing inter-conmiunication  more  convenient.  Such  corpora- 
tions are  known  as  public  utility  or  public  service  com- 
panies, and  comprise  those  engaged  in  supplying  transpor- 
tation facilities,  gas,  electric  light,  heat,  water  and  power. 
In  only  one  respect  are  these  corporations  analogous  to  cor- 
porations in  another  field,  and  that  is  in  regard  to  trans- 
portation. In  all  other  respects  these  corporations  belong 
distinctly  to  an  individual  class.  The  street  car  lines  pro- 
vide a  convenient  service  to  a  congested  community  in 
traveling  cheaply  and  quickl}^  from  one  place  to  another. 
They  supply  in  a  smaller  sense  the  service  the  steam  rail- 
roads give  in  covering  greater  distances. 

But  only  in  recent  years  have  public  service  cor- 
porations come  to  occupy  their  present  position  of  promi- 
nence and  importance  as  a  field  for  the  profitable  ex- 
ploitation of  capital.  It  might  also  be  stated  'that  the 
golden  age,  if  there  can  be  said  to  be  such  in  the  his- 
tory of  corporations,  came  to  them  with  tlie  advent  of 
electricity,  that  subtle  force  which  introduced  an  eco- 
nomic revolution  in  low  operating  cost.  In  the  days  anti- 
dating  steam  and  electi'icity,  when  horse  cars  were  the  mode 
of  transportation,  the  service  was  so  slow  there  was  little 
profit  in  the  business  and  next  to  nothing  if  the  capitaliza- 
tion was  large.  Nor  was  there  much  improvement  with  the 
change  from  horse  cars  to  cars  propelled  by  cable.  AVhile 
it  was  a  step  forward  to  haul  cars  in  trains  of  two  or  more 
coupled  to  a  cable  car,  the  coal  required  to  provide  the  power 

to  run  the  cable,  ate  up  almost  all  that  was  saved  by  dis- 
cs 


64  LOUIS  GUENTHER 

pcnsing  with  horse  power.  Likewise  breakdowns  occurred 
so  frequently  with  cable  power  as  to  make  that  an  expen- 
sive item  in  the  operating  cost.  All  these  disadvantages, 
however,  were  finallv  overcome  with  the  advent  of  the  first 
electric  trolley  car.  The  cost  of  producing  power  by  elec- 
tricity was  reduced  to  a  minimum.  It  made  possible  trans- 
portation facilities  to  serve  remote  sections  of  large  cities. 
It  gave  to  the  smallest  towTis  a  street  car  service— a  direct 
stimulus  to  growth.  But  what  may  be  regarded  as  the  most 
phenomenal  development  has  been  the  upbuilding  of  inter- 
urban  traffic,  which  is  today  making  electrical  roads  keen 
and  aggressive  competitors  of  the  steam  roads.  All  this  is 
possible  because  it  costs  less  to  operate  the  lines  and  the 
service  is  maintained  at  low  cost  and  is  more  efficient. 

In  what  strong  position  electric  interurban  transporta- 
tion is  entrenched  in  this  country  will  be  readily  appreciated 
when  it  is  known  that  it  is  possible  now  to  start  in  a  trolley 
car,  for  instance  from  New  York  City,  and  almost  cross  the 
whole  state.  There  are  breaks  in  the  lines  in  onlv  one  or 
two  places  which  are  not  yet  bridged  by  connecting  electric 
roads.  The  interurban  practically  parallels  the  New  York 
Central  Railroad  all  the  way  from  New  York  to  Buffalo. 
In  fact  thev  have  become  such  keen  agc:ressors  for  the  shc^rt 
haul  business,  which,  by  the  way,  is  the  most  profitable 
traffic,  as  to  compel  the  big  railroads  in  self  defense  to  ab- 
sorb the  principal  electric  interurban  lines  in  order  to  main- 
tain their  dominating  position.  The  New  York,  New  TIaven 
&  Hartford  was  actually  forced  to  take  under  its  wing, 
through  a  separate  c<U']")oration,  the  interurban  lines  touch- 
ing every  place  of  impoi'tance  in  Connecticut  and  Massa- 
chusetts, or  face  the  penalty  of  heavy  inroads  u]ion  its  pas- 
senger and  light  freight  business.  The  management  of  the 
Southern  Pacific,  seeing  far  ahead  the  possible  encroach- 
ment the  electric  roads  in  Southern  Calif(U'in'a  might 
make  u]K>n  its  earnings,  did  not  wait  until  this  stage  was 
reached,  but  secured  control  of  all  the  important  lines  at 


INVESTMENTS  AND  SPECULATION  65 

the  first  opportunity  presenting  itself.  Today  a  traveler 
can,  by  means  of  these  long-distance  trolley  lines,  reach  al- 
most every  part  of  Ohio.  In  Indiana,  similar  conditions 
prevail,  as  also  in  the  larger  portions  of  Illinois  and  Penn- 
sylvania. 

Nowadays  a  person  may  obtain  a  berth  in  a  trolley 
sleeper  car  in  the  evening  at  Dayton,  Ohio,  and  be  in 
Indianapolis  early  the  next  morning.  He  may  ti'avel  in 
similar  comfort  from  Peoria  to  St.  Louis  over  the  Illinois 
Traction  lines.  All  this  but  gives  a  faint  idea  of  the  re- 
markable evolution  electric  power  has  brought  about  in 
transportation.  There  are  prophets,  whose  claims  are  by 
no  means  disbelieved,  who  say  that  it  will  not  be  long  be- 
fore the  monster  engines  used  now  to  haul  long  trains  of 
passenger  coaches  and  freight  cars  will  eventually  be  dis- 
placed and  become  antiquated  and  a  memory,  as  are  the  old 
horse  cars  of  twenty  years  ago.  That  this  is  the  tendency 
is  borne  out  by  the  present  use  of  some  railroads,  notably 
the  New  York  Central  and  New  Haven,  of  large  electrical 
Westinghouse  motors.  The  experiment  is  even  now  being 
tested  of  propelling  cars  with  electric  storage  batteries  so 
far  with  some  measure  of  success.  If  this  new  power  is 
perfected,  even  greater  economy  in  operation  will  be  in- 
troduced, dispensing  as  it  will,  with  trolley  wires  and  costly 
power-generating  stations  which  it  is  now  absolutely  neces- 
sary to  maintain.  The  interurban  electric  roads  have  even 
another  important  advantage  over  their  older  rivals,  the 
steam  roads,  in  that  they  can  stop  for  passengers  anywhere 
desired,  by  the  motoraian  simply  turning  his  controller. 
The  steam  roads  can  only  stop  at  designated  stations  ac- 
cording to  schedule. 

That  huge  amounts  of  capital  have  gone  into  these 
projects  occasions  no  surprise,  nor  is  it  strange  that 
we  should  witness  the  increasing  favor  the  public  is  show- 
ing towards  public  service  corporation  securities,  especial- 
ly those  of  the  more  consei'\'ative  type.    Yet  the  evolution 

B.VII— 5 


66  LOUIS  GUENTHER 

from  one  form  of  motive  powt-r  to  aiiothci-  lias  brought 
some  stranji^e  changes  in  its  train.  In  New  York  City, 
the  old  lines,  already  overcapitalized,  were  compelled, 
with  each  change  or  step  forward  in  economy  of  operation, 
to  increase  their  capital  burden,  with  the  result  that  in  the 
end  they  collapsed,  in  spite  of  the  fact  that  in  a  city  like 
New  York,  wiiere  there  is  such  a  density  in  population,  the 
revenues  derived  from  carrying  passengers  from  one  part 
of  the  city  to  another  should  be  exceedingly  profitable.  But 
by  adding  obligation  ui)on  obligation  to  their  capital,  the 
New  York  traction  financiers  succeeded  in  making  it  ob- 
ligatory on  some  of  the  lines  to  earn  profits  on  as  much  as 
$1,000,000  capital  per  mile  and  all  on  nickel  fares.  Small 
wonder  that  the  end  w^as  bankruptcy  and  such  a  tangled 
state  of  affairs  that  a  long  period  must  elapse  before  the 
New^  York  surface  lines  can  be  successfully  extricated  from 
their  financial  embarrassment.  Charles  T.  Yerkes  brought 
about  a  similar  state  of  affairs  in  the  West  Side  and  North 
Side  lines  in  Chicago,  which  required  years  to  readjust,  and 
only  after  disastrous  losses  were  sustained  by  thousands  of 
shareholders.  Philadelphia  is  similarly  afflicted  with  an 
overcapitalized  traction  system.  Happily,  these  cases  are 
only  the  direct  results  of  an  evil  proceeding  from  the  de- 
sire of  the  interests  in  control  to  fatten  their  fortunes  at 
the  expense  of  the  public  and  investors.  A\'here  there  is  a 
normal  cai)italization  and  the  properties  under  the  control 
of  honc^st  and  conservative  management,  they  have  proved 
for  their  shareholders  a  more  than  satisfactory  source  of 
revenue,  and  the  secured  obligatioils,  like  the  bonds,  have 
sho%Mi  themselves  among  the  safest  fomis  of  investment. 
But  in  judging  this  class  of  investment,  there  are  a  num- 
ber of  im])ortant  factors  which  should  l)e  taken  into  consid- 
eration. First  and  foremost,  is  the  franchise  under  whieh  the 
pu])lic  service  corporati(Ui  operates.  Especially  is  this  of 
importance  as  far  as  the  bonds  are  concerned.  The  fran- 
chise is  the  kevnote  of  their  success  in  business.    AVe  have 


INVESTMENTS  AND  SPECULATION  67 

seen  how  imfortimate  it  sometimes  turns  out  for  a  public 
service  corj^oration,  when  its  franchise  expires,  as  in  the 
case  of  the  traction  companies  serving  the  cities  of  Chicago 
and  Clevehmd,  and  to  a  less  degree  likewise  in  Toledo  and 
Detroit.  The  difficulties  between  the  cities  of  Chicago  and 
Cleveland  and  the  traction  companies  are  now  adjusted  on 
terms  mutuallv  satisfactorv  to  both  interests,  but  not  with- 
out  considerable  loss  to  shareholders  and  bondholders  alike. 
In  Detroit  and  Toledo,  the  renewal  of  the  franchises  still 
remains  open,  the  cities  and  the  companies  not  being  able 
to  arrive  at  a  settlement  of  their  troubles.    Eventuallv  their 

« 

difficulties  will  be  amicably  adjusted,  as  the  jDublic  has  al- 
ways shown  a  disj^osition  to  be  fair. 

Public  utility  corporations  imfortmiately  are  in  a  vul- 
nerable position  to  become  the  shining  target  for  ambitious 
politicians,  who,  when  they  find  they  cannot  win  votes  by 
any  other  propaganda,  as  a  last  resort,  turn  upon  these 
corporations  in  their  own  community.  By  making  it  ap- 
pear that  they  are  in  business  to  oppress  the  people,  they 
endeavor  to  arouse  an  agitation  for  the  fantastic  scheme 
of  public  ownership  and  operation.  It  is  a  useful  propa- 
ganda to  win  votes.  In  most  of  the  cities  where  this  scheme 
has  been  tried,  it  has  proved  a  flat  failure.  And  failures 
they  will  continue  to  be  until  the  average  politician  and 
henchmen  who  feed  at  the  public  crib,  develop  capacity 
as  good  business  men.  But  as  long  as  these  clashes  take 
place,  the  lengih  of  a  company's  franchise  is  an  all-impor- 
tant question  in  2:)roperly  appraising  its  securities  for  in- 
vestment and  speculative  puii^oses. 

If  the  franchise  expires  after  a  company's  outstanding 
bonds  mature,  some  authorities  contend  thev  are  safe  in- 
vestments,  providing  the  net  earnings  indicate  a  sufficient 
margin  in  excess  of  the  fixed  interest  charges.  In  this  con- 
tention they  are  partly  correct,  since,  whether  the  corpora- 
tion redeems  its  bonds  or  not,  the  expiring  loan  in  some  man- 
ner must  be  paid. 


68  LOUIS  GUENTHER 

A  corporation's  management,  is,  in  my  opinion,  of  equal 
importance.  If  that  management  follows  a  policy  of  cater- 
ing to  public  opinion  and  bends  every  energy  to  supply 
its  products  to  the  community  at  a  reasonable  charge,  after 
allowing  for  a  fair  profit,  the  probabilities  are  that  the  com- 
munity and  the  corporation  will  exist  in  peace.  It  has  been 
demonstrated  in  a  number  of  instances  that  such  wiselv 
managed  properties  have  had  public  opinion  liohind  thorn 
when  attacked  by  designing  politicians. 

Some  public  service  corporations  are  very  fortunate  in 
owning  perpetual  franchises.  This  places  them  in  an  un- 
assailable position.  They  do  not  face  the  danger  of  a  possi- 
ble contest  over  the  renewal  of  their  privileges.  The  only 
danger  that  may  confront  them  is  where  the  community 
grants  a  rival  company  another  franchise,  but  this  does  not 
always  turn  to  the  public's  advantage.  This  is  at  least 
true  as  far  as  concerns  the  use  of  the  telephone.  AVhen  it 
becomes  necessarj^  to  use  rival  telephones  to  give  a  satis- 
factory sei*\4ce,  it  is  very  seldom  profitable.  There  is  no 
advantage  where  there  are  two  charges  witliout  obtaining 
anv  additional  benefit,  when  one  service  can  do  the  work 
equally  well.  Generally  speaking,  this  advantage  affects 
equally  all  public  ser\ace  corporations. 

There  is  one  development  in  the  recent  financing  of  pub- 
lic service  corporations  which  should  not  be  overlooked— the 
tendencv  towards  conservatism.  In  this,  those  directlv  con- 
cerned  in  promoting  them  have  shown  that  they  have  ab- 
sorbed a  lesson  from  past  experience.  They  now  build  their 
structures  on  firmer  foundations.  Xew  ])onds  issued  for 
improvements  are  on  a  more  reasonable  basis.  In  many 
cases  it  is  stipulated  that  additional  bonds  shall  only  be  sold 
up  to  from  75  to  85  per  cent  of  the  actual  cost  of  additions 
and  extensions,  thus  creating  from  the  very  beginning  a 
substantial  equity  above  the  bonded  debt.  Where  it  is  pos- 
sible, the  builders  of  interurban  trolley  lines  secure  private 
rights  of  ways  to  overcome  difficulties  regarding  franchises. 


INVESTMENTS  AND  SPECULATION  69 

The  states  also  have  realized  the  wisdom  of  cultivating 
capital  rather  than  discouraging  it  from  entering  upon  pro- 
jects designed  "to  serve  the  public  convenience.  Public  serv- 
ice commissions  have  been  created  to  deal  intelligently 
with  this  problem.  These  commissions  are  vested  with  the 
power  to  allow  the  corporations  under  their  control  to  in- 
crease their  capital  as  well  as  to  refuse  the  privilege  when 
it  appears  that  the  necessity  for  more  capital  does  not  really 
exist.  It  is  also  within  the  power  of  these  boards  to  refuse 
franchises  when,  in  their  opinion,  a  rival  corporation,  in- 
stead of  benefiting  a  community,  adds  only  a  burden.  While, 
of  course,  this  system  of  control  has  some  disadvantages, 
the  general  good  they  have  thus  far  accomplished,  out- 
wei2:hs  the  drawbacks.  At  least  it  shows  a  desire  on  the 
part  of  the  states  to  take  the  public  utility  corporations 
out  of  politics,  which  is  more  or  less  at  the  bottom  of  most 
of  the  friction  between  corporations  and  communities. 

However,  it  cannot  be  denied  that,  for  some  years,  the 
public  service  corporations  have  as  a  class,  made  such  an 
excellent  showing  as  consistent  revenue  producers,  that  they 
have  become  popular  with  the  investment  public.  The  panic 
of  1907  and  the  year  of  depression  which  followed  gave 
them  an  excellent  opportunity  to  demonstrate  their  stability. 
A  great  many  of  the  companies  turned  this  hard  corner 
with  increased  earnings,  whereas  the  earnings  of  corpora- 
tions operating  in  other  fields  showed  a  sharp  falling  off. 

There  is  a  logical  explanation  for  this.  It  must  be  borne 
in  mind  that  the  public  can  save  little  on  gas,  light,  heat  or 
power.  It  must  ride  back  and  forth  from  business.  What 
is  lost  by  a  smaller  consumption  is  far  more  than  made  up 
by  the  increased  demands  of  a  growing  population.  Sta- 
tistics prove  that. 

Then,  also,  well-managed  gas,  heat  and  electric  light 
corporations  have  carried  on  a  campaign  of  education, 
showing   their   patrons   how   their   service   may   be   used 


70  LOUIS  GUENTHER 

in  other  directions,  thus  increasing  their  patronage. 
Electric  ranges  and  gas  stoves  have  proved  splendid  drum- 
mers for  business.  The  uses  of  electricity  for  advertising 
have  also  been  a  source  of  considerably  increased  revenues. 
Electric  power  plants  as  well  as  plants  generating  power 
fi'om  water,  have  made  a  pennanent  place  for  themselves 
wholly  by  the  economy  thoy  have  introduced  in  the  cost  of 
power. 

All  these  factors  are  worthy  of  consideration  in  so  far 
as  they  explain  the  influences  behind  these  corporations 
working  for  their  success.  As  they  are  in  a  business  of 
providing  actual  necessities,  they  are  indispensable  to  a 
community.  The  investor,  therefore,  is  assured  that  the 
business  has,  at  least,  solid  gi'ound  as  its  foundation. 

When  electricitv  was  first  discovered,  it  raised  the  fear 
that  the  end  of  gas  as  a  source  of  light  had  been  reached,  but 
this  a])prehension  has  proved  unfounded.  ^lore  gas  is  con- 
sumed today  than  ever  before  and  the  consumption  is  likely 
to  continue  to  increase.  AVhile  interurban  electric  roads 
have  done  a  large  business  and  are  aggressive  competitors 
of  the  steam  roads,  it  is  nevertheless  a  fact,  as  is  shown  bv 
their  increased  revenues  reported  to  the  Interstate  Com- 
merce Commission,  that  the  railroads  are  doing  a  larger 
business  than  ever  before.  The  hydro-electric  power  plants 
have  by  no  means  cut  into  the  output  of  the  coal  mines.  In 
fact,  our  constant  growth  in  po]">ulation  can  be  relied  up- 

071  to  use  all  the  ?iew  means  available  for  creating  power, 
light,  transportation  and  heat. 

Another  fact  worth v  of  comment,  is  the  tendencv  to- 
wai'ds  concentration  of  management  of  public  service  cor- 
porations into  holding  companies.  Quite  a  number  of  such 
eorporatioTis  have  been  organized  and  as  a  general  rule  have 
been  successful.  One  of  these  companies  controlling  a  large 
mimber  of  subsidiary  companies  operating  in  cities  has 
earned  exceptional  profits  for  its  shareholders. 

These  holding  companies,  unlike  their  namesakes,  op- 


INVESTMENTS  AND  SPECULATION  71 

orating  in  the  railroad  and  industrial  field,  are  virtually 
imnume  from  the  restrictions  placed  by  the  Sherman  law 
over  all  interstate  commerce,  or  business  transacted  be- 
tween different  states.  Their  business  is  all  concentrated 
in  the  commimities  which  their  plants  supply.  Only  when 
they  control  electric  roads  crossing  two  states  are  they  sub- 
ject to  the  law  Congress  enacted  to  control  trusts  from  re- 
straining free  competition. 

'As  it  is  compulsory  in  nearly  all  states  for  public  service 
corporations  to  publish  detailed  statements  of  earnings,  the 
purchasers  of  these  securities  have  little  difficulty  in  deter- 
mining the  investment  opportunities  and  speculative  possi- 
bilities in  their  bonds  and  shares. 

The  truth  is  that  there  is  more  compulsory  public- 
ity governing  this  particular  class  of  corporation  than  with 
any  other  class.  The  reason  is  that  the  public,  by  whose  will 
they  exist,  have  more  than  an  ordinary  interest  in  their 
success  and  behavior. 


XII.    OTHER  BOXDS. 

There  still  remain  other  means  by  aid  of  which  cor- 
porations manage  to  borrow  money,  but  they  do  not  involve 
the  necessity  of  pledging  any  tangible  assets,  as  is  the  case 
with  the  different  ])onds  described  in  the  previous  section. 

It  is  not  by  their  names  that  these  bonds  may  be  known, 
for  thev,  too,  are  known  as  bonds.  It  is  bv  their  character 
that  thev  should  be  known,  bv  which  I  mean  that  the  investor 
ought  to  look  carefully  into  them,  for,  masquerading,  as 
they  do,  under  the  general  name  of  a  bond,  there  is  always 
the  possibility  of  acquiring  a  security  without  any  intrinsic 
value  behind  it,  which  fact  is  not  discovered  until  after 
something  goes  wrong. 

Prominent  among  such  securities  is  the  income  bond.  To 
the  uninitiated  investor,  the  word ' '  income ' '  has  a  confidence- 
inspiring  swing  to  it,  but  in  all  realit}^  the  so-called  income 
bond  only  pledges  the  corporation  to  pay  the  promised  in- 
terest when  it  is  earned,  and  not  otherwise.  A  case  in  point 
where  such  a  bond  proved  no  better  investment  than  a  non- 
producing  stock,  was  that  of  the  income  mortgage  bonds 
of  the  Central  Railroad  of  Georgia,  of  which  there  are  three 
—the  first,  second  and  third  preferred  mortgage  income 
bonds.  On  the  second  and  third  income  bonds,  the  interest 
has  not  been  paid  for  some  years,  and  finally,  in  exaspera- 
tion, the  holders  of  the  second  income  bonds  brought  suit 
to  force  the  company  to  pay  them  their  interest  first  before 
diverting  the  net  profits  to  improvements.  AVhile  they  won 
their  case,  their  predicament  during  the  years  when  no  re- 
turns were  received  convevs  its  own  lesson  of  the  insecu- 
rity  rather  than  the  securitv  of  the  income  that  lurks  be- 
hind  an  investment  in  income  bonds.  Some  stocks  are  pre- 
ferable to  income  bonds.    Such  bonds  should  be  thoroughly 

72 


INVESTMENTS  AND  SPECULATION  73 

investigated  before  accepted  as  a  desirable  investment ;  es- 
pecially should  the  profits  the  company  is  earning  and  has 
earned  over  a  period  of  years  be  looked  into,  for  it  is  from 
this  source  the  pajTiients  of  the  interest  on  the  bonds  are 
derived. 

There  is  also  the  collateral  bond,  not  differing  very 
much  from  the  income  bond,  except  technically.  Bonds 
of  this  character  have  as  their  security  stocks  or  bonds 
in  other  corporations.  There  are  many  of  this  class  of 
bonds  in  existence.  They  are  the  outgrowth  of  the  tend- 
ency in  recent  years  of  the  stronger  corporation  to  ab- 
sorb the  business  of  rival  corporations,  and  they  are  also 
the  direct  outgrowth  of  the  holding  company  plan.  The 
holding  company  is  a  form  of  corporation  which  is  not  it- 
self directly  engaged  in  business,  but  which  holds  the 
controlling  stocks  and  bonds  of  actual  operating  corpora- 
tions, and  against  the  ownership  of  these  securities  they 
issue  their  own  stocks  and  bonds.  It  is  these  holding  com- 
panies that  have  acquired  the  name  of  trusts. 

In  nearly  every  important  industry  may  be  found  the 
holding  corporation.  To  mention  a  few,  there  are  the  Amer- 
ican Tobacco  Co.,  the  International  Harvester  Co.,  the  In- 
terborough-Metropolitan,  the  Rock  Island  Co.,  the  Amer- 
ican Chicle  Co.,  and  the  International  ^Mercantile  Marine, 
all  corporations  owning  the  majority  of  the  securities  of 
other  coi-porations.    These  are  only  a  few  of  them. 

Some  of  these  holding  coi'porations  have  issued 
bonds,  pledging  for  theii*  security  either  the  stocks  or 
bonds  of  the  subsidiary  corporations.  They  are  the  col- 
lateral bonds.  Other  corporations  which  do  not  exactly 
come  within  the  definition  of  a  holding  company  also  is- 
sue such  bonds.  For  this  interest  they  depend  upon  the 
earnings  or  income  received  from  other  underlying  secu- 
rities. 

An  applicable  illustration  of  what  collateral  bonds  are 
is  found  in  the  Interborough-Metropolitan  4^   per  cent 


74  LOUIS  GUENTHER 

collateral  bonds.  For  each  unit  in  this  bond  of  two  liundrcd 
dollars,  there  is  pledp:ed  one  share  of  stock,  with  a  par  value 
of  $100  of  the  Interborou.e:h  Rapid  Transit  Pompany,  which 
operates  the  Subway  in  New  York  City.  This  underlying 
company  pays  9  per  cent  dividend  each  year  on  its  stock, 
which  is  equivalent  to  the  4^  per  cent  intorost  paid  on  the 
collateral  bonds. 

These  bonds  differ  from  income  bonds  onl}^  in  that 
their  interest  must  be  paid.  This  is  an  implied  oblii^a- 
tion.  The  interest  is  paid  as  long  as  the  collateral  se- 
curities back  of  the  bonds  earn  a  sufficient  income.  When 
this  income  falls  off  and  a  default  takes  place,  the  holder 
of  such  bonds  may  take  over  the  collateral  by  due  process 
of  law.  They  then  find  themselves  in  the  position  of  fall- 
ing heir  to  other  securities,  either  as  stockholders  or  as 
bondholders  in  the  underlying  corporations.  The  fact  that 
the  securities  were  unable  to  earn  enough  to  pay  their  in- 
terest, in  most  instances  does  not  improve  the  situation 
much.  From  a  standjxunt  of  safety,  the  majority  of  col- 
lateral bonds,  as  a  final  analysis,  cannot  be  ranked  as  suit- 
al)le  investments  for  any  one  dependent  upon  income  and 
seen  r  it  V. 

It  mav  well  be  said  for  some  of  these  bonds  that  thev 
are  entitled  onlv  to  the  designation  of  bonds  to  distinL::uish 
them  from  stocks,  in  that  they  })laee  theii*  holders  in 
the  category  of  creditors  of  a  cor])oration,  whereas  a 
stockholder  can  only  participate  in  the  profits  when  there 
are  any  to  disburse.  The  one  nuist  l)e  paid  to  maintain  the 
coiporation's  solvency ;  the  other  must  take  its  chances. 

Not  infrequently  a  strong  corporation  employs  its  credit 
merely  as  the  sole  security  for  an  issue  of  bonds.  At  other 
times,  in  addition  to  pledging  its  credit,  other  collateral  may 
be  added.  AVhere  such  l)onds  are  issued  they  are  termed  dc- 
hcntnrc  hands.  In  reality  they  are  but  a  note  like  the  plain 
merchant's  note  such  as  banks  discount  every  day  without 
calling  upon  the  borrower  f(»r  any  other  security  than  his 


INVESTMENTS  AND  SPECULATION  75 

name  affixed  to  his  note,  acccptinp;  his  credit  rating  as  suffi- 
cient guarantee  that  the  note  \vill  be  paid  when  it  matures, 
or  else  if  the  bank  is  not  wholly  satisfied  with  the  standing 
of  the  maker  of  the  note,  it  will  demand,  for  added  security, 
that  the  note  be  endorsed  by  one  or  more  persons  satisfac- 
tory to  the  bank.  In  the  debenture  bonds,  a  corporation, 
instead  of  going  to  the  banks  for  a  loan,  aj^proaches  inves- 
tors whom  it  is  prepared  to  pay  a  fixed  I'ate  of  interest  for 
a  term  of  jTars,  for  the  use  of  their  capital.  Such  bonds 
should  be  appraised  by  the  rule  ajDplied  to  a  merchant's 
note— on  the  credit  standing  of  the  maker,  and  this  is  us- 
ually determined  by  the  periodical  statements  of  earnings 
issued,  indicating  the  profits  in  excess  of  all  operating  costs. 

In  the  covvcrfihJc  bond,  modern  finance  has  evolved  a  de- 
vice to  tempt  forth  the  capital  of  investors  who,  while  still 
wishing  to  maintain  their  position  as  creditors  of  a  cor- 
poration, desire  a  speculative  opportunity  to  share  in  the 
future  prosperity  of  the  business.  The  convertible  bond 
serves  this  end.  Such  bonds  carry  a  call  upon  another  se- 
curity at  a  given  price,  usually  considerably  in  excess  of 
the  market  value  at  the  time  the  bonds  are  issued.  AVhen 
the  convertible  price  is  reached,  the  holders  of  the  bond  may 
exercise  the  privilege  of  exchanging  their  bonds  into  the 
other  security.  The  convertil)le  l)onds  of  the  Union  Pacific  is- 
sued some  years  ago  brought  a  round  profit  to  those  who  held 
them  until  the  company's  shares  reached  their  conversion 
price.  The  Atchison  is  another  road  where  this  also  hap- 
pened. Among  the  industrial  corporations  a  striking  ox- 
ample  is  the  American  Telephone  &  Telegraph  Company, 
whose  shares  advanced  to  where  it  became  profitabh^  for 
the  holders  of  an  early  issue  of  convei'tible  bonds  to  exchange 
them  for  the  company's  stock  which  was  receiving  8  per 
cent  in  dividend,  in  contrast  to  the  smaller  interest  received 
from  the  bonds. 

Quite  a  number  of  our  corporations  have  resorted 
to  convertible  bonds  as  an  expedient  to  make  loans,  but 


76  LOUIS  GUENTHER 

the  successes  attendant  upon  some  of  these  issues  by 
no  means  cloak  these  securities  with  the  character  of 
unusual  investments.  On  not  a  few  of  this  class  of 
bonds,  the  convertible  privileges  represent  a  forlorn  hope 
that  an  opportunity  of  making  a  profitable  exchange  may 
present  itself.  Seldom  are  there  any  assets  of  a  tangible 
character  ])lodged  behind  the  convertible  bond.  If  such 
is  the  case,  their  character  is  stipulated  in  the  mortgage. 
They  are  considered  as  coming  within  a  semi-spoculative 
class  of  investments.  For  that  very  I'cason  they  should 
be  carefullv  scrutinized  bv  investors.  Their  safetv  largolv 
depends  upon  the  issuing  company's  continued  prosperity. 

With  a  description  of  a  few  more  securities  included  in 
the  definition  of  bonds  of  a  general  character,  I  shall  close 
this  section. 

The  most  important  of  the  securities  which  still  re- 
main to  be  described  is  the  short  term  note— a  useful  fi- 
nancial expedient  in  periods  when  there  is  a  scarcity  of 
capital  and,  because  of  this  condition,  exacting  interest 
rates.  To  meet  this  situation,  coi']-)orations  borrow  capital 
for  their  pressing  needs  for  only  a  short  term  of  years  by 
means  of  notes  running  for  a  brief  period,  and  agree  to  pay 
interest  on  them  in  accordance  with  the  current  rate.  Tn 
hard  times  it  would  be  folly  for  a  corporation  to  make  a 
long  term  loan  for  two  reasons,  one  of  which  is  that  such 
a  loan,  at  the  curi*ent  hi.L;li  rates,  would  prove  unusually 
expensive  if  spread  over  a  long  time,  and  the  other  and 
more  important  reason  is  the  disastrous  iiifiuence  likely  to 
follow  in  depressing  the  price  of  the  outstanding  lionds 
which  a  corporation  had  sold  when  there  was  a  plethora 
of  monev  and  interest  rates  were  low. 

If  the  holder  of  a  4  per  cent  bond  having  still  ten 
years  to  run,  saw  an  opportunity  to  replace  it  for  a  5 
per  cent  bond  of  his  corporation  which  would  not  ma- 
ture before  their  security  matured,  the  natural  inclina- 
tion would  be  to  exchange  the  one  for  the  other.     It  is 


INVESTMENTS  AND  SPECULATION  77 

to  equalize  the  interest  with  the  bonds  already  outstand- 
ing, that  short  term  notes  are  employed.  This  class  of 
securities  crowd  upon  the  market  in  panic  years  and  in 
the  years  of  depression  which  follow.  Other  securities 
might  mature  in  these  abnormal  periods  which  must  be 
taken  care  of  or  capital  may  be  needed  for  other  purposes. 

The  late  H.  H.  Rogers,  rich  as  he  was,  found  himself  in  a 
tight  corner  in  the  panic  of  1907.  He  was  just  finishing  the 
Tidewater  Railroad  and  needed  a  few  million  dollars  hur- 
riedly. It  was  out  of  question  to  raise  this  money  by  offer- 
ing first  mortgage  bonds,  especially  on  an  incompleted  rail- 
road. The  banks  were  not  lending  any  money  except  on 
gilt-edged  collateral.  Mr.  Rogers  could  not  allow  his  cher- 
ished ambition  to  fail  in  this  critical  period  without  strik- 
ing a  great  blow  at  his  prestige.  He  was  forced  to  issue 
short  term  notes  carrying  6  per  cent  interest  and  had  to 
pledge  to  insure  their  security  a  large  part  of  his  invest- 
ments in  Standard  Oil,  and  shares  in  banks  and  gas  com- 
panies—in all  over  $18,000,000,  the  income  on  which  more 
than  a  number  of  times  provided  for  the  interest  on  the 
notes.  Mr.  Rogers'  experience  illustrates  that  periods  are 
reached  in  nearly  every  rich  man's  career  when  borrowing 
monev  is  not  an  easv  matter. 

Nor  do  corporations  escape  the  exactions  placed  upon 
them  by  hard  times.  Municipalities  enjoying  in  normal 
times  the  best  of  credit,  are  forced  to  pay  large  interest  to 
borrow  what  money  they  need.  A  case  in  point  is  that  of 
the  city  of  New  York,  Avhich  although  at  one  time,  only  a 
few  years  previous  to  the  1907  panic,  readily  sold  3^  per 
cent  bonds  at  a  premium,  was  forced  to  raise  its  interest 
rate  to  4^  per  cent. 

To  the  average  investor  the  purchase  of  bonds  is  based 
on  the  interest  they  pay,  but  that  is  not  always  the  income 
they  yield.  Figuring  out  income  is  a  science  in  itself.  A 
bond  may  call  for  4  per  cent  interest  per  annum  and  yet 
may  yield  a  larger  income  than  a  5  per  cent  bond,  due  to  the 


78  LOUIS  GUENTHER 

earlier  maturity  and  to  the  fact  that  it  is  sellinj]^  at  a  dis- 
count, whereas  the  other  bond  may  run  longer  and  he  quoted 
at  a  premium.  A  table  is  puljlished  and  used  ])y  all  bond 
dealers,  bv  which  mav  be  determined  what  the  income  vield 
is  on  each  ]x)nd  for  the  length  of  time  it  has  to  run,  the  price 
it  can  be  had  for  and  the  fixed  rate  of  interest. 

Reverting  to  short  tenn  notes,  corporations  by  their  use 
finance  their  needs  to  bridge  a  period  of  tight  money,  de- 
pending upon  their  ability  with  the  return  of  easier  con- 
ditions to  refund  these  obh'gations  with  a  security  which 
calls  for  a  more  reasonable  interest  rate.  Most  of  the  large 
railroads  and  industrial  corporations  have  found  these 
short  term  (obligations  a  great  convenience  in  trying  times. 

"We  have  what  are  known  as  trust  receipt.^.  These  are 
receipts  issued  by  a  trust  comi^nny  in  return  for  se- 
curities placed  with  them  as  custodians.  These  receipts, 
like  bonds,  are  issued  in  a  negotiable  form  so  that 
dealings  in  them  can  be  carried  on  readily.  There  are 
voting  trust  receipts,  a  security  protected  by  aui^ther 
security  for  which  a  voting  trust  has  been  formed,  con- 
sisting of  a  number  of  directors.  They  are  also  nego- 
tiable. The  scheme  of  the  voting  trust  is  to  maintain  the 
control  of  a  corporation  in  cei^tain  hands  for  a  prescribed 
length  of  time  in  order  to  insure  one  continued  management 
of  its  affairs.  The  idea  when  properly  a2'>plied  may  turn 
to  a  corporation's  advantage,  but  sometimes  it  is  used  to 
peiT)etuate,  for  a  number  of  years,  control  in  certain  hands 
without  the  necessit}^  of  making  heavy  investments,  which 
would  become  the  case  were  not  all  the  stor-k  iu  a  voting 
trust. 

Interim  certificates  are  merely  promises  to  deliver  Ijonds 
or  other  securities  when  they  are  ready  for  distribu- 
tion and  which  mav  not  be  enu:raved  and  all  signed  bv  the 
pro]ier  officers  when  they  are  first  offered  to  the  public.  In 
their  place,  certificates,  called  interim  certific<ites,  issued  to 
bearer,  are  given  to  be  exchanged  when  the  other  securities 
are  readv  for  delivcrv. 


INVESTMENTS  AND  SPECULATION  79 

Last,  ])nt  not  least  in  importance,  is  the  cerfificnfe 
of  deposit,  which,  as  its  name  indicates,  identifies  the 
holder  as  havinc;  deposited  at  a  certain  place  the  se- 
curities described  in  the  certificate.  These  certificates  of 
deposits  are  the  outgrowth  of  the  reorganizations  of  em- 
barrassed corporations.  When  this  unfoi'tunate  situation 
is  reached,  the  more  important  holders  of  the  securities 
form  a  connnittee  for  the  mutual  protection  of  all  the 
holders  of  the  same  class  of  securities.  An  agreement  is 
dra^ATi  up  by  attorneys,  vesting  this  committee  with  certain 
powers  to  effect  a  reorganization,  and  a  call  is  issued  to  the 
security  holders  to  deposit  their  security  with  a  designated 
trust  company.  In  signing  this  agTcement  and  upon  deposit 
of  their  security,  the  holder  then  appoints  the  committee 
his  agent  or  attorney  to  do  all  of  the  things  stipulated  in 
the  agreement  and  share  ratably  all  the  expenses  his  com- 
mittee contracts  for.  The  trust  company  which  acts  as  a 
depository  issues  a  certificate  of  deposit,  usually  to  bearer, 
identifying  the  holder  as  the  true  owner  of  the  securities 
as  described  which  have  been  deposited  with  it.  Then, 
when  a  reorganization  has  been  brought  about,  whatever 
new  securities  are  authorized  in  the  place  of  the  old  ones, 
are  exchanged  for  these  certificates  of  deposit  after  all  ex- 
penses of  the  committee  have  been  paid.  Cei-tificates  of  de- 
posit may  apply  equally  to  stocks  as  well  as  to  bonds.  They 
are  mei'ely  mentioned  here  as  a  security  which,  applying 
to  bonds,  may  as  well  be  described  now  as  later.  As  their 
very  character  shows  an  interest  in  a  banknipt  corporation, 
there  is  hardly  any  necessity'  to  discuss  their  investment 
value.  That  depends  entiivly  upon  the  security  itself  which 
is  pledged.  If  a  first  mortgage  bond,  then  there  may  be  be- 
hind it  more  than  enough  property  to  protect  the  creditor  in 
full,  including,  even  covering,  the  accmed  interest.  Rome- 
times  this  does  not  appear  to  be  the  case,  as,  for  example,  the 
first  mortgage  bonds  of  the  insolvent  Wabash-Pittsburg 
Terminal  Railroad.    The  holders  of  these  bonds  were  com- 


80  LOUIS  GUENTHER 

pelled  to  fight  to  keep  from  haviug  to  take  an  inferior  secu- 
rity in  return  for  the  one  thev  now  hold.  The  certificate  of  de- 
posit,  the  negotiable  instrument  evolved  by  the  reorgani- 
zation idea,  in  our  scheme  of  bringing  to  life  once  more  our 
prostrate  corporations,  is  credited  with  owing  its  existence 
to  the  ingenuity  of  J.  P.  Morgan,  the  greatest  reorganizer, 
more  than  to  anvone  else. 

With  a  brief  mention  of  commercial  paper  we  shall  have 
disposed  with  this  security.  Essentially  forming  an  invest- 
ment more  for  banks  than  individuals,  it  will  hardly  inter- 
est the  student  of  finance  unless  he  is  shaping  his  education 
towards  a  banking  career.  The  degrees  of  safety  in  com- 
mercial paper  vary  with  the  standing  of  the  maker.  Prime 
commercial  paper  is  the  note  with  but  simply  the  maker's 
name.  "With  each  endorsement  there  is  indicated  the  exac- 
tions placed  upon  the  borrowers  by  the  banks  bef(n-e  they 
will  make  the  loan.  Yet  this  is  not  always  true.  The  paper 
of  some  large  coi-porations,  to  make  it  readily  saleable 
throue^h  note  brokers,  will  carry  a  number  of  endorsements. 


XIII.    IRRIGATION  BONDS. 

It  is  the  history  of  every  virile  and  progressive  nation 
that  in  time  all  of  its  land  capable  of  subjugation  to  the 
plow  becomes  occupied.  We  are  in  such  a  period  now.  Our 
principal  reservations,  consisting  of  natural  tillable  land 
originally  set  aside  for  the  Indians,  whom  the  country  has 
considered  its  wards,  have  all  been  opened  for  settlement 
so  that  even  this  pre-empted  land  is  now  largely  occupied 
by  white  settlers. 

But  our  population  continues  to  grow.  With  its  gi'owth 
there  has  arisen  a  serious  need  to  employ  our  arid  lands  for 
agricultural  purposes.  Of  such  land  we  have  enormous 
stretches.  Efforts  are  now  made  to  reclaim  these  lands  by 
bringing  water  to  them  l)y  artificial  means.  Not  only  are 
we  considering  means  by  which  the  parched  sands  of  our 
different  desert  areas  may  be  made  to  blossom,  but  we  are 
also  hard  at  work  planning  how  our  swamp  lands  may  be 
redeemed  for  agi'icultural  exploitation  by  draining  them  of 
their  stagnant  ])ools  and  bayous. 

Our  po]nilati()n  has  gro\\Ti  so  large  that  every  square  foot 
of  ground  that  is  possible  to  reclaim  b}"  artificial  methods 
is  worth  while  saving.  It  matters  not  whether  this  can  be 
accomplished  by  irrigation  or  drainage. 

Our  o\\n  government  early  recognized  the  possibility 
of  reclaiminc:  its  deserts  bv  harnessing  mountain  sti'eams 
and  turning  their  waters  to  beneficial  use.  The  government 
has  already  spent  millions  of  dollars  in  building  giant 
reservoirs  for  the  storage  of  water,  and  ditches  to  carry 
this  water  to  lands  which  needed  it  in  order  to  become  pro- 
ductive. 

Irrigation  is  ])v  nu  means  a  modern  science.  It  is  almost 
as  old  as  the  human  race  itself.    The  ancient  Egyptians  of 

B.vn— 6  81 


82  LOUIS  GUENTHER 

the  Nile  \'alloy  depoDded  upon  it  as  early  as  in  the  time 
of  Ptolemy  and  had  developed  it  to  such  a  point  that  their 
country  was  virtually  the  granary  of  the  ancient  world. 
^^'ith  lis,  lidwcvcr,  ii'ri<:i;ation  is  a  somewhat  new  problem, 
as  it  was  not  necessary  for  us  to  go  to  the  length  of  arti- 
ficially watering  land  while  there  yet  remained  open  for 
settlement  plentv  of  land  well-watered  ])v  nature  and  cul- 
tivable  bv  natural  means. 

Private  capital,  always  keenly  alive  to  opportunities  for 
profit,  has  also  seen  opportunities  in  the  work  of  reclaiming 
our  large  arid  land  areas.  AVhat  the  Government  could  do, 
capital  felt  it  could  do  also.  The  result  has  been  that  within 
the  past  few  years  a  considerable  number  of  privately  or- 
ganized irrigation  projects  have  sprung  up,  capital  for 
which  has  been  raised  bv  the  sale  of  irrigation  b(^nds.  As 
this  class  of  bonds  constitutes  by  no  means  a  seasoned  in- 
vestment, it  should  ])e  most  carefullv  considered  before  be- 
ing  selected  as  a  profitable  and  safe  medium  through  which 
to  make  investments. 

Already  a  large  number  of  these  projects  have  failed 
because  those  back  of  them  were  inexperienced  in  this 
particular  field  and  allowed  their  optimism  to  becloud 
their  better  judgment.  It  requires  more  than  the  mere 
building  of  reservoirs  and  ditches  to  carry  the  water, 
to  assure  the  financial  success  of  an  irrigation  project. 
Not  only  is  a  continual  supply  of  water  requisite  but 
also  the  certainty  of  a  sufficient  number  of  farmers  to  settle 
the  land  is  necessary.  Likewise,  these  fanners  must  know 
how  to  cultivate  successfully  land  supplied  with  the  re- 
quired water  provided  by  artificial  means,  as  irrigation  is 
a  method  of  farming  wholly  distinct  in  character  from  that 
followed  on  farm  lands  nourished  by  rainfall. 

Our  Government  recognized  the  danger  likely  to  arise 
from  the  reckless  exploitiition  of  irrigation  sclu^mes  and, 
as  a  measure  of  protection  for  the  farmer  and  investor  alike 
some  years  ago  enacted  what  is  kno"\^Ti  as  the  Carey  Act. 


INVESTMENTS  AND  SPECULATION  83 

Under  this  act,  authority  was  conferred  upon  the  states 
and  territorial  governments  to  pass  upon  the  jjUms  pre- 
pared by  privately  organized  irrigation  projects  for  the  con- 
struction of  reservoirs,  ditches  and  laterals,  or  small  canals 
by  means  of  which  the  land  was  to  be  fed  with  water.  By 
the  same  act  rights  to  the  available  water  supply  were  con- 
ferred to  prevent  the  overabsorption  of  the  needed  supply 
by  too  many  separate  enterprises,  but  despite  these  wise 
precautions,  failures  have  occurred  indicating  how  nnicli 
judgment  can  err  in  an  entirely  new  and  untried  held. 

As  irrigation  bonds  are  a  distinctly  new  security,  it 
is  interesting  to  know  on  what  they  are  based  and  how 
they  are  issued.  The  capitalists  behind  these  projects 
aim  to  raise  the  money  required  to  construct  their  res- 
ervoirs, ditches  and  canals  by  the  sale  of  first  mortgage 
irrigation  bonds.  The}'  incorporate  a  company  which  is 
to  own  all  the  facilities  for  storing  the  water  and  carry- 
ing it  to  the  land.  They  stake  out  the  acreage  for 
which  their  company  is  to  supi^ly  water.  They  then  sell 
to  newcomers  the  water  rights  for  a  fixed  sum  per  acre. 
To  make  the  illustration  clearer  I  shall  say  they  ask  $40  an 
acre  for  their  water  rights.  This  gives  the  settlers  perpet- 
ual rights  for  the  use  of  a  certain  quantity  of  water  for  their 
land  each  season.  To  secure  these  water  rights  the  farmer 
gives  a  mortgage  on  his  land.  These  mortgages  are  the  col- 
lateral pledged  to  secure  the  holders  of  the  irrigation  bonds 
and  as  the  fanners  pay  off  their  mortgages  in  easy  install- 
ments, the  bonds  are  retired  serially  at  different  maturities. 
The  stockholders  in  these  companies  ex})ect  their  profits 
from  what  is  left  after  the  bonded  debt  is  cleaned  up. 

All  this  of  course  is  feasible.  Exj^eriments  have  proved 
that  the  chemical  elements  in  desert  land,  when  properly  wa- 
tered, give  the  ground  a  richness  and  fertility  which  make 
these  lands  prolific  producers  of  certain  agricultural  prod- 
ucts.   The  Twin  Falls  section  of  Idaho  is  a  verv  excc^llent 

ft' 

example  of  the  large  measure  of  success  iJossible  from  the 


84  LOUIS  GUENTHER 

application  of  intelligent  irrigation.  Xot  only  has  this  sec- 
tion of  the  state  prospered  in  an  exceptional  degree  by  har- 
nessing the  mountain  streams  and  diverting  their  waters 
to  the  dry  lands  where  most  wanted,  but,  as  a  direct  result 
of  the  large  agi'icultural  population  thus  brought  in,  a  num- 
ber of  prosperous  towns  have  sprung  up  whirh  would  uovor 
have  existed  under  anv  other  conditions. 

But  the  mere  presence  of  water  in  arid  countries  is 
not  always  a  guarantee  that  dependence  can  be  placed 
upon  a  sufficient  supply  in  dry  seasons.  Desert  streams 
are  likely  to  thin  out  at  the  most  critical  time.  Herein 
lies  one  danger  likely  to  threaten  an  ii'rigation  project. 
Skilled  engineers  of  long  experience  are  necessary  to 
gauge  the  quantity  of  the  water  supply,  to  build  reser- 
voirs in  the  I'ight  places,  to  construct  economically  the 
necessary  ditches  and  canals  so  that  there  will  be  no 
likelihood  of  the  clogging  up  with  the  shifting  sands  in 
the  near  future.  Even  then  all  these  provisions  do  not  make 
for  absolute  safety  of  irrigation  bonds.  There  must  also  be 
the  certainty  that  there  is  no  legal  flaw  to  the  rights  to  the 
water  supply;  also  that  there  will  be  no  disapj^ointment  in 
the  sale  of  water  rights  sufficient  to  provide  enough  acreage 
to  redeem  all  the  bonds  and  pay  all  the  interest.  The  mere 
fact  that  a  reservior  is  constructed,  also  all  the  ditches  and 
canals,  is  not  in  itself  a  complete  assurance  of  the  safety 
of  irrigation  bonds,  as  the  farmer  is  supposed  to  pay  off  his 
water  rights  in  easy  pa^^nents  covering  a  stated  number 
of  years  and  he  can  onl}"  do  it  by  obtaining  his  water  regular- 

A  dry  season  is  likely  to  cause  an  ii-rigation  company 
to  default  on  its  interest  because  it  will  be  unable  to  collect 
from  the  settlers  their  payments,  unless  behind  the  projects 
are  financial  interests  strong  enough  to  see  it  safely  through 
an  off  season.  Likewise  until  such  projects  are  completed 
and  settlers  for  the  land  secured,  the  irrigation  bonds  it 
issues,  properly  eonsidered,  are  construction  bonds,  that  is, 


'INVESTMENTS  AND  SPECULATION  85 

bonds  of  an  incompleted  enterprise  whose  interest  must  be 
provided  out  of  the  treasury  of  the  company  until  it  is  in 
a  position  to  earn  revenues. 

There  are  no  bonds  more  speculative  than  bonds  of  this 
character.  In  fact  the  interest  their  holders  receive,  in 
most  instances,  comes  directly  from  the  very  money  they 
pay  in  for  their  bonds.  Because  of  this  element  of  uncer- 
tainty, it  is  of  vital  importance  that  the  financial  standing 
of  the  backers  of  an  enterprise,  no  matter  what  its  char- 
acter, be  carefully  weighed,  to  determine  whether  they  are 
strong  enough  to  finance  their  project  to  completion.  How- 
ever bright  the  prospects  may  appear,  no  enterprise  can 
take  advantage  of  them  until  it  is  first  completely  financed. 
For  the  risk  investors  must  assume  in  a  project  in  the  pro- 
cess of  construction,  they  should,  in  all  fairness,  receive,  in 
addition  to  the  bonds  they  buy,  a  certain  proportion  in  stock 
as  a  bonus,  for  they  speculate  on  the  chances  of  success,  and 
should  financial  difficulties  arise,  which  is  always  a  possi- 
bilitv,  thev  face  an  assessment  in  an  effort  to  raise  the 
money  to  again  put  the  enterprise  on  a  going  basis. 

Some  of  the  bankers  who  have  handled  such  issues  of  secu- 
rities have  realized  these  elements  of  chance  and  have  made 
provisions  to  overcome  them  by  guaranteeing  their  bonds, 
both  as  to  principal  and  interest,  by  the  assets  and  income  of 
a  going  and  prosperous  concern.  But  not  all  bankers  are 
so  far-seeing.  The  result  is  that  in  some  of  these  issues 
which  have  defaulted  their  holders  have  found  themselves 
in  the  distressing  position  of  possessing  a  very  insecure 
bond  and  that  thev  could  not  be  worse  off  had  thev  been 
stockholders,  instead  of  bondholders. 

All  this  is  clearly  pointed  out  to  the  readers  of  this  book 
to  acquaint  them  properly  vAih  the  care  necessary  to  exer- 
cise in  properly  appraising  the  different  classes  of  irriga- 
tion bonds  coming  to  their  notice. 

In  theory,  irrigation  is  practicable.  Its  value  to  this 
country  now  and  in  the  future  cannot  be  disputed.    As  we 


86  LOUIS  GUENTHER 

gain  a  greater  knowiodfico  about  its  proper  application, 
there  w^ll  be  less  experimenting  with  other  peoples'  money, 
as  is  always  the  ease  when  capital  ventures  into  now  and 
untried  fields. 

Our  Covernment,  as  late  as  1910,  authorized  a  large 
issue  of  bonds,  the  ])roceeds  of  which  ar<'  to  be  used  to 
can-y  foiw.Mid  on  a  nnich  larger  scale,  the  ii-rigation  work 
planned  by  the  Department  of  Reclamation.  Those  bonds 
are  to  be  redeemed  out  of  the  money  realized  l)y  the 
Government  from  the  sale  of  water  rights  to  the  settlers. 

Some  of  our  western  states,  in  an  effort  to  reclaim  their 
arid  lands,  have  arranged  by  legislation  that  certain  dis- 
ti-icts  may  organize  into  municipal  districts  and  issue  bonds 
for  irrigation  puiT^oses.  But  their  bonds  are  by  no  means 
as  safe  as  the  bonds  which  the  new  government  irrigation 
laws  authorize.  They  are  in  fact,  in  some  instances,  inferior 
to  irrigation  bonds  of  privately  organized  enterprises. 
These  municipal  irrigation  disti'ict  bonds  depend  for  their 
interest  and  redemption  upon  the  ability  of  the  connnu- 
nity  to  pay  the  taxes.  Tn  a  good  many  instances,  the  amount 
of  such  bond  issues  is  not  based  on  the  already  existing 
population,  but  on  a  future  population  that  is  expected 
when  the  district  receives  the  full  benefit  from  the  irriga- 
tion planned  by  the  issuance  of  the  bonds.  If  the  irriga- 
tion project  is  a  failure  and  the  expected  water  does  not 
materialize,  naturally  the  settlers  then  have  no  means  to 
meet  their  taxes  and  their  lands  which  remain  dry  are  hard- 
ly then  worth  foreclosing  upon.  That  this  is  possible  has 
alreadv  been  sho^^^l  by  the  default  of  interest  on  a  number 
of  such  munici]ial  irrigation  district  bonds  of  Colorado  dur- 
ing 1910  and  1911. 


XIV.    BOXDS  IN  MINING  ENTERPRISES. 

Beyond  all  doubt  there  is  no  type  of  bonds  more  spec- 
ulative than  those  issued  against  undevel()i)ed  ventures, 
whatever  their  nature,  be  it  coal,  silver,  marble,  lead,  zinc, 
gold  or  copper  properties.  For  one  thing  they  are  se- 
cured by  an  invisible  asset,  whose  value  can  only  be  esti- 
mated by  the  uncertain  skill  of  mining  engineers. 

We  are  told,  especially  in  connection  with  copper-mining 
properties,  that  mining  engineers  have  so  far  reduced  their 
profession  to  an  exact  science,  as  to  be  able  to  determine, 
where  indications  of  copper  ore  have  been  discovered,  how 
they  may  block  out  the  ore  and  measure  the  amount  underly- 
ing the  claims.  This  they  claim  can  be  done  by  drilling  to  get 
at  the  percentage  of  copper  to  each  ton  of  ore,  and  then, 
by  multiplying  the  one  by  the  other,  arrive  at  the  value 
of  the  underground  deposits.  In  other  words  they  contend 
they  can  reduce  mining  to  a  point  where  there  is  no  more 
uncertainty  regarding  its  ultimate  outcome  than  in  manu- 
facturing. 

I  do  not  put  any  faith  in  this  specious  argument,  at 
least  not  so  long  as  some  of  the  most  prominent  mining 
engineers  continue  making  serious  blunders  in  their  esti- 
mates. John  Hays  Hammond,  who  is  regarded  as  one  of  the 
foremost  men  in  his  profession,  has  repeatedly  erred  in  his 
reports  on  mining  properties. 

If  it  is  possible  to  measure  with  any  degree  of  certainty 
the  treasures  Mother  Earth  conceals,  it  dues  not  reach  far 
beyond  the  coarser  mineral  formations  like  coal  and  marble. 
The  last  mentioned,  because  it  is  of  a  quarry  formation, 
comes  in  vast  quantities  and  wdiere  found  is  of  a  perpen- 
dicular formation,  in  layers  or  strata,  thus  permitting  one 
to  place  a  certain  reliance  upon  measurements.    Coal,  on 

87 


88  LOUIS  GUENTHER 

the  other  hand,  runs  in  liorizontal  layers,  for  it  is  foi-med 
by  the  c«irbonization  of  decayed  vegetable  life.  The  softer 
coal,  or  that  known  as  bituminous  coal,  lies  nearest  to  the 
earth's  surface.  As  coal  is  found  in  blanket  formation,  it 
is  possible,  where  a  field  is  discovered,  to  determine  to  a  cer- 
tain extent  the  quantity  of  the  deposits  by  means  of  core 
drillino:. 

That  is  not  true,  thoui^di,  of  the  more  precious  minerals. 
Nature  has  not  been  so  provident  in  the  distribution 
of  these  minerals  that  their  quantity  can  be  measured 
bv  any  vard-stick.  It  is  the  ^vl•iter's  contention  that  of  all 
assets,  undeveloped  mininu*  properties  do  not  at  all  ]jrop- 
erly  belong  to  a  class  of  securities  on  which  bonds  should 
be  issued.  An  investor  might  as  well  take  his  chances  with 
all  the  other  stockholders  in  the  enterprise  and  share  in  the 
profits  if  the  undertaking  ])roves  successful. 

A  bond  in  an  undeveloped  mining  enterprise  represents 
the  most  perishable  kind  of  asset.  Tf  the  mineral  yield  be- 
comes exhausted,  the  property'  then  has  no  value  beyond 
the  mills  and  mine  structures,  which  at  most,  as  assets, 
are  not  worth  veiy  much,  unless  usable  by  a  going  mine. 

The  holder  of  a  mining  bond  has  to  depend  for  the  return 
of  his  principal  and  interest  upon  the  profits  realized  from 
the  ore  produced.  It  is  therefore  necessary  that  the  mine's 
life  and  ])rodur-tion  shall  extend  beyond  the  maturity  of 
the  bontls  issued  by  it.  TIow  can  this  be  kimwii  to  a  cer- 
tainty? 

Tlic  majority  of  mining  bonds  are  ivssucd  as  conver- 
tible bonds,  giving  the  holder  the  o]^]>ortunity  of  chang- 
ing his  position  as  creditor  into  partner  at  a  certain  fixed 
price  for  the  stock,  but  it  may  be  assumed  that  if  a  mine 
development  points  to  success,  the  bondholder  might  as  well 
from  the  begiiuiing  be  a  stockholder,  considering  all  the  risk 
he  has  to  take,  for  did  the  mine  fail,  he  would  be  out  in  the 
cold  with  the  stockholders,  except  in  that  he  could  fore- 
close upon  barren,  unproductive  mining  claims  of  no  value. 


INVESTMENTS  AND  SPECULATION  89 

Bonds  in  oil  companies  are  of  a  similar  class.  No  assur- 
ance can  be  placed  upon  the  continuation  of  the  oil  supply. 
To  satisfy  ourselves  as  to  what  a  dangerous  class  of  invest- 
ments these  bonds  belong,  we  need  look  no  further  than  the 
great  mass  of  such  defaulted  securities. 

Of  course,  I  refer  principally  to  mining  companies 
in  process  of  development.  There  are  mining  properties 
whose  bonds  come  within  the  category  of  investments. 
These  bonds  are,  however  issued  by  corporations  which  are 
already  assured  of  a  certain  production  and  have  issued 
bonds  to  provide  funds  for  opening  up  new  areas,  but  which 
are  not  dependent  for  their  redemption  upon  the  new  ores, 
but  assure  their  pajTiient,  both  as  to  principal  and  interest, 
out  of  their  present  and  known  production.  There  is  a  large 
number  of  such  mining  corporations,  notably  so  in  the  case 
of  successful  coal-mining  companies. 

I  have  now  covered  as  fully  as  it  is  possible  within 
the  narrow  compass  of  a  popular  text-book,  all  the 
principal  classes  of  bonds.  !A.  reference  might  be  made 
to  steamship  bonds  which  have  as  their  security  the  vessels 
controlled  by  the  corporations  and  also  its  wharves  and 
docks.  The  values  in  such  bonds  must  be  considered  in  the 
light  of  earnings  statements  issued  by  these  corporations, 
the  insurance  funds  on  hand  in  case  of  loss  of  vessels,  and 
the  allowances  made  for  depreciation  to  provide  for  the 
wear  and  tear  in  water  transportation. 

What  wise  provisions  should  be  made  against  the  ele- 
ments steamship  lines  must  constantly  fight  against  has 
an  illr.minating  illustration  in  the  loss  of  the  steam- 
ship '  Republic"  of  the  International  Mercantile  ^larine 
Line,  a  disaster  that  is  still  fresh  in  our  memor5\  The 
sinking  of  this  steamer  resulted  in  a  total  loss  of  over 
one  million  dollars.  Still  the  loss  of  this  palatial  steamer 
had  no  effect  upon  the  corporation's  resources.  It  had  for 
years  set  aside  a  certain  percentage  of  the  gross  earnings 
as  an  insurance  fund  for  this  very  eventuality. 


XV.    Ti:\rBER  BONDS. 

Our  available  timl)t'r  rosonrces  have  reached  that  stage 
of  dc})lcti()n  wh(M"t'  what  tiiiilx'r  tracts  remain  are  consid- 
ered exceedin,L,^ly  vahiahlc.  Sd  nmch  so  is  this  the  cnndi- 
tion  that  within  the  last  few  years  timber  bonds  have  come 
to  be  regarded  as  desirable  for  nse  as  security  for  l)ond  is- 
sues. Standing  timber  of  itself  is  only  valua])le  when  it 
can  be  cut  and  brought  at  a  profit  to  the  market.  But  for 
the  purpose  of  securing  a  bond  issue,  there  are  certain  ele- 
ments of  risk  which  should  be  seriously  taken  into  con- 
sideration. Above  all,  the  greatest  risk  is  that  of  fire,  which 
is  likely  to  quickly  denude  a  tract  of  the  greater  part  of  its 
standing  timber.  Insurance  companies  will  not  accept  risks 
on  standing  timber,  for  they  consider  the  hazard  as  too 
great. 

The  owTiers  of  standing  timber,  however,  attempt 
to  guard  against  fire  by  many  ingenious  methods:  build- 
ing ditches  and  embankments  through  the  tract  to  check 
the  spread  of  a  fire;  establishing  patrols  and  fire  stations; 
cutting  away  the  thick  undergrowth ;  and  back-firing  a  for- 
est by  expenenced  foresters.  But  notwithstanding  all  these 
wise  measures  of  precaution,  bonds  liased  u]ion  timber  lands 
should  be  classified  as  coming  within  the  class  of  s]i(M-iila- 
tive  bonds,  from  which,  Ix'cause  of  the  risks  involved,  an 
unusually  good  income  should  be  received  by  tlutse  who  in- 
vest their  money  in  them. 

A  timber  bond  issue  is  based  upon  the  quantity  of  stand' 
ing  timber  against  which  the  bonds  are  issued.  "Cruisers,'' 
or  men  who  measure  the  timber,  are  depended  upon  to  make 
the  estimate  and  on  their  figures  and  the  market  price  tim- 
ber commands,  the  bonds  are  issued.  From  this  it  may  be 
inferred  what  great  dependence  the  investors  must  i)lace 
upon  the  accuracy  of  human  intelligence. 

90 


INVESTMENTS  AND  SPECULATION  91 

To  retire  the  houds  a  certain  pei-eentajj^e  is  set  aside  each 
yoiw  fr(ini  the  sale  of  the  tiniher,  and  that  percentage  shouhl 
])e  large  enough  to  I'edeeni  the  honds  automatically,  as  every 
foot  of  timher  cut  correspondingly  reduces  the  assets  se- 
curing the  bonds,  which  cannot  again  he  replaced  except 
through  new  growth  from  replanting.  Where  this  is  done, 
it  is  a  slow  process. 

There  is  no  general  rule  by  which  the  intrinsic  value 
of  timber  can  be  measured,  for  chance  and  the  immeasur- 
able human  element  largely  enter  into  it.  The  character  of 
the  men  behind  such  propositions  is  equal  in  importance, 
in  connection  with  the  safetv  of  timber  bonds,  to  the  safe 
guards  against  tires.  The  conservative  appraisal  of  the 
amount  of  timber  available,  the  nearness  of  the  tract  to  a 
market,  the  price  of  the  timber  and  the  percentage  set  aside 
from  each  year's  sales,  all  have  an  important  bearing  on 
such  bonds  and  demand  from  investors  their  most  careful 
scrutiny. 


XVI.     GUARANTEED  STOCKS. 

Large  corporations  sometimes  find  it  more  convenient, 
in  securing  control  of  smaller  corporations  whose  strate- 
gical position  or  favorable  earnings  will  benetit  them,  to 
guarantee  the  interest  on  their  bonds  and  dividends  on 
their  stock,  than  to  lay  out  a  considera))le  amount  of  money 
to  acquire  them.  Often  control  cannot  be  acquired,  as  the 
majority  of  the  holders  of  the  securities  of  the  corpora- 
tion will  not  part  with  them,  but  do  not  object  to  a  lease 
of  their  property  in  return  for  a  guarantee  of  a  certain 
dividend  upon  their  shares. 

There  are  a  large  number  of  small  railroads  whose 
names,  if  given,  would  be  unfamiliar  now  to  the  general 
public,  although  they  are  very  prosperous  properties,  w^hose 
dividends  on  their  shares  are  guaranteed  by  other  rail- 
roads. These  roads  w^re  taken  over  bv  lease  manv  vears 
ago,  and  have  become  so  grafted  into  the  main  system  of 
their  guarantor  roads,  that  the)'  are  today,  in  all  essentials, 
a  vital  part  of  the  larger  corporations. 

Parts  of  nearly  all  of  our  principal  trunk  lines  are  made 
up  of  smaller  roads  welded  into  one,  although  existing  as 
separate  cor])orations.  This  is  the  condition  which  inves- 
tigation will  show^  exists  in  the  cases  of  the  Delaware  &  Hud- 
son, the  Lackawanna,  the  Reading,  the  Pennsylvania,  the 
New  York  Central,  the  Lehiixh  Vallev,  the  Jersev  Central 
and  other  roads.  Some  of  the  small  roads  whose  dividends 
these  roads  guarantee,  existed  before  the  holding  corpor- 
ations came  into  existence.  The  ]\rorris  &  Essex  Railroad 
is  an  example.  The  road  w\as  built  before  the  Delaware, 
Lackawanna  &  "Western,  as  one  system,  was  planned. 

Quite  naturally  these  guaranteed  stocks  as  an  invest- 
ment are  graded  acc(U'ding  to  the  importance  which  the 

92 


INVESTMENTS  AND  SPECULATION  93 

properties  bear  to  the  corporations  leasing  them  and  also 
with  respect  to  the  financial  strength  of  the  guarantors.  With 
such  financially  powerful  corporations  like  the  Pennsyl- 
vania and  the  Lackawanna,  the  stocks  of  leased  lines  whose 
dividends  they  guarantee,  grade  as  high  in  conservative  in- 
vestment circles  as  do  their  best  mortgage  bonds.  That  is 
why  these  stocks  sell  at  a  stiff  premium.  The  dividends 
guaranteed  on  some  of  these  leased  lines'  stocks  run  as  high 
as  12  per  cent  to  16  per  cent  per  annum,  but  they  command 
prices  which  i-educe  their  net  yield  close  to  4  per  cent  per 
annum.  The  holders  of  these  securities,  which  consist  either 
of  estates  to  whom  the  shares  were  left,  banks,  life  insur- 
ance companies  and  individual  investors,  are  not  anxious  to 
dispose  of  these  stocks,  as  they  fully  realize  the  intrinsic 
value  of  their  investments.  The  more  closely  guaranteed 
stocks  are  held,  the  more  it  reflects  the  superior  position 
accorded  them  in  financial  circles. 

There  are  leased  line  guaranteed  stocks  which  could  be 
safely  regarded  as  immune  even  from  the  severest  panic. 
Their  impregnable  position  is  entirely  due  to  the  fact  that 
they  could  not  be  adandoned  without  dismembering  an  im- 
portant system,  a  thing  which  the  o^vners  of  securities 
amounting  to  millions,  would  not  permit  under  any  cir- 
cumstance. 

Railroad  policies  enter  largely  into  the  policy  of  absorb- 
ing other  roads  bj^  means  of  leasing.  The  elimination  of 
competition  at  times,  is  behind  the  policy.  At  other  times 
one  road  will  acquire  control  of  another  to  keep  an  impor- 
tant rival  from  gaining  an  entrance  into  a  certain  territory. 
Again  the  purpose  behind  such  a  deal  may  consist  simply 
of  the  idea  that  the  lease  would  prove  profitable. 

The  long-headed  people  back  of  the  Canadian  Pacific 
had  plans  to  get  into  Chicago.  To  build  a  road  to  the  im- 
portant traffic-originating  centers  would  prove  a  costly  bit 
of  financing,  and  even  then  it  would  remain  a  serious  prob- 
lem whether  a  new  line  could  earn  its  board.    Therefore, 


94  LOUIS  GUENTHER 

when  the  Wisconsin  Central  was  in  the  market,  the  Cana- 
dian Pacific  saw  an  opportunity  to  reach  Chicago  without 
great  expense,  by  leasing  this  property,  in  return  for  wliich 
it  guaranteed  a  small  dividend  on  the  road's  preferred  stock. 

In  the  expansion  of  our  railroads,  the  practice  of  ab- 
sorbing, by  lease,  important  roads  with  whirh  an  alliance 
would  be  pr{»fita))le  will  go  on  steadily.  With  the  growth 
of  traffic  on  these  leased  lines,  their  business  frequently 
turns  into  the  treasury  of  the  controlling  road  a  good  profit, 
as  they  are  entitled  to  the  profits  in  excess  of  what  is  re- 
quired for  the  dividends  they  guarantee. 

As  the  earnings  of  the  leased  lines  are  ineluded  in  the 
earnings  of  the  controlling  lines,  there  is  no  way  of  detor- 
niining  what  is  their  actual  income  return.  But  in  this  the 
investor  is  not  actually  interested,  as  long  as  the  guarantors 
hold  good  their  guaranty.  It  is  realized  that  they  cannot  de- 
fault in  the  payment  of  the  dividends  without  losing  control 
of  the  property,  which  they  seldom  desire  to  do. 

Industrial  corporations  also  guarantee  the  dividends  of 
rivals  they  have  absorbed.  Their  guaranteed  stocks  should 
be  judged  hy  the  margin  of  ]U'ofits  they  report  in  their  an- 
nual statements.  In  this  manner  their  securitv  as  invest- 
mcnts  can  be  properly  appraised. 


XVII.    AMORTIZATION  AND  SINKING  FUNDS. 

Amortization  means  the  reduction  of  debt.  A  corpora- 
tion issuing  bonds  may  prefer  to  provide  for  their  payment 
when  they  mature  through  a  sinking  fund,  for  the  account 
of  which  a  stated  sum  is  set  aside  each  year,  rather  than  to 
rely  on  other  means  to  discharge  the  debt  when  it  falls  due. 

This  policy  has  many  advantages.  It  makes  it  much 
easier  to  discharge  the  debt,  as  the  payments  made  when 
spread  over  a  period  of  years  are  less  burdensome  than 
when  provided  in  a  lump  sum.  Then,  also,  contributions 
to  a  sinking  fund  to  amortize  gradually  a  bonded  obliga- 
tion, can  be  made  to  earn  interest,  which  interest,  compound- 
ing itself,  also  accumulates  money  towards  the  pajanent  of 
the  debt.    Thus  money  is  made  to  earn  money. 

It  is  frequently  provided,  in  the  interest  of  a  sinking 
fund,  that  bonds,  for  the  retirement  of  which  the  sinking 
fund  has  been  created,  can  be  repurchased  at  a  stated  price, 
either  by  call  upon  the  holders  of  the  bonds  or  in  the  open 
market.  A  corporation  either  then  cancels  the  bonds  and 
reduces  its  fixed  charges,  or  pays  into  the  sinking  fund  the 
coupons  of  the  bonds  which  have  been  purchased  for  its 
account. 

There  are  various  ways  by  which  a  sinking  fund  oper- 
ates. They  cannot  all  be  mentioned  here.  But  a  ])(>nd  that 
has  set  aside  for  its  retirement  a  sinking  fund,  or  for  which 
arrangements  have  been  made  to  amortize  by  gradual  pay- 
ments is  considerably  strengthened  as  an  investment  where 
the  operations  of  a  corporation  are  profitable. 

The  fact  that  a  sinking  fund  has  been  created  for  the 
retirement  of  certain  bonds  is  not  alone  proof  of  strength. 
If  a  corporation  is  making  no  profit,  it  cannot  lay  aside 
money  for  its  sinking  fund.     Certainly  it  ainnot  take  the 

95 


96  LOUIS  GUENTHER 

necessary  money  out  uf  its  capital,  as  that  only  weakens  the 
corporation  in  one  direction,  without  strengthening  it  in  an- 
other. 

Where  the  advantage  of  amortization  lies,  is  in  connec- 
tion with  bonds  issued  b}^  producing  mine  companies,  and 
cori)orations  engaged  in  operating  in  perishable  assets.  By 
setting  aside  a  part  of  the  proceeds  from  the  sale  of  its  prod- 
ucts, it  is  more  certain  to  retire  the  bonds  whon  thoy  ma- 
ture. Without  a  sinking  fund,  surh  coi-porations  face  the 
danger  of  not  having  the  money  on  hand  to  pay  off  the  bonds 
and  have  no  way  of  attaining  it,  should  their  properties  ex- 
haust themselves, 


XVIII.    BONDS  FOR  WOMEN  AND  ESTATES. 

Investments  for  women  and  estates  ought  to  have  elim- 
inated all  the  speculative  elements,  as  far  as  human  fore- 
sight can  guard  against  them.  Women  and  children  belong 
to  a  class  of  investors  who  can  least  afford  to  take  risks, 
no  matter  how  small,  as  they  have  no  means  of  repairing 
their  losses  in  the  event  that  any  of  their  securities  go 
wrong,  dependent,  as  they  are,  upon  the  continuation  of 
their  incomes. 

An  ilhistration  of  how  necessary  it  is  to  exercise  ex- 
treme care  when  making  investments  for  women  and  es- 
tates is  recalled  in  a  distressing  case  that  came  to  my  at- 
tention as  the  outcome  of  the  failure  of  the  Third  Avenue 
Railroad.  An  elderlv  woman  was  left  300  shares  of  the 
stock  in  this  company  when  they  were  selling  around  $200 
a  share  and  when  there  was  not  even  a  breath  of  suspicion 
that  anything  could  go  wrong  with  this  property.  This 
stock  represented  an  investment  at  the  then  market  price 
of  over  $60,000  and  was  sufficient  to  give  the  woman  an  in- 
come of  over  $3,000  a  year,  enough  to  jDrovide  for  all  her  ne- 
cessary comforts.  Overnight  her  fortune  was  swept  away 
and  her  income  vanished  as  the  result  of  the  faihire  of  the 
company.  In  place  of  comfort  for  her  declining  years  she 
saw  poverty  staring  her  in  the  face.  She  was  finally  pre- 
vailed to  seil  \\vv  stock  for  $30  a  share,  stock  that  cost  $200, 
for  she  had  no  means  with  which  to  pay  a  large  assessment, 
and  on  the  interest  she  receives  from  her  money  in  a  strong 
savings  bank,  she  is  finding  it  hard  to  make  both  ends  meet. 

It  would  have  been  far  better  for  this  woman  to  have 
had  her  $60,000  invested  in  government  bonds  even  though 
they  would  have  brought  her  an  income  of  only  $1,200  a 
year. 

B.VII— 7  ^"^ 


98  LOUIS  GUENTHER 

I  cite  this  ciisc  to  clearly  point  out  that  the  smallest  risk 
can  quickly  become  the  j^reatest  risk.  Such  bonds  as  con- 
struction bonds,  mining  bonds,  collateral  bonds,  unsecured 
debenture  bonds  and  notes,  or  for  that  matter  any  bonds  un- 
less properly  secured  by  physical  assets,  belong  to  invest- 
ments that  camiot  be  safely  recommended  to  dependent 
women  or  estates.  In  saying  this,  there  is  no  intention  to 
retk'ct  ui)on  the  desirable  securities  of  this  class,  of  which 
there  are  many,  but  to  emphasize  the  advisability  of  miui- 
mizint;  all  risks. 

Securitv  for  such  investors  is  the  foremost  considera- 
tion.  Income  is  secondary.  The  undoing  of  most  of  these 
investors  di recti v  results  from  a  desire  to  increase  the  in- 
come  at  the  expense  of  safety. 

In  the  selection  of  investments  for  women  and  estates 
the  suggestion  is  made  that  the  same  rules  be  applied  as 
govern  the  investments  of  savings  banks  in  Massiichusetts, 
New  York,  Connecticut,  Illinois,  Ohio,  Pennsylvania  and 
other  states.  These  laws  are  the  combined  result  of  tho 
most  careful  study  in  determining  the  safest  character  of 
investments. 

Copies  of  these  laws  may  be  easily  secured  by  writing 
to  the  secretary  of  state  of  each  of  the  respective  states. 


XIX.     THE  MARKET  FOR  BONDS. 

Much  discussion  has  arisen  over  the  question  as  to 
whether  a  bond  is  in  a  stronger  position  as  an  investment 
if  it  has  a  quick  market  or  not.  It  cannot  be  denied  that 
marketability  has  certain  advantages,  but  on  the  other  side 
of  the  question,  there  is  also  the  indisputable  argument 
that  the  broader  a  market  for  a  bond,  the  less  income  it 
brings.  This  question  is  one  largely  decided  by  the  needs 
of  the  investor.  If  he  desires  a  permanent  investment,  one 
which  it  is  his  intention  to  hold  until  maturity,  the  ques- 
tion of  a  market  is  not  of  prime  importance.  The  question 
is  important,  however,  for  those  investors  and  banking  in- 
stitutions forced  to  realize  quickh^  upon  their  securities  in 
order  to  obtain  funds. 

If  a  market  were  the  essential  requirement  for  all  in- 
vestments, manv  inactive  bonds  would  be  excluded  from 
consideration,  even  though  from  a  point  of  absolute  se- 
curity, they  are  sometimes  far  safer  than  some  bonds  which 
may  be  sold  readily  at  any  moment  they  arc  offered.  To  a 
large  extent  would  this  be  true  of  real  estate  and  farm  mort- 
gages, which  are  excellent  investments  and  are  purchased 
to  hold  until  they  fall  due.  Nor  is  a  quick  market  the  most 
desirable  for  timid  investors.  A  general  decline  in  the  se- 
curity markets  which  may  have  no  bearing  at  all  upon  in- 
vestment values  might  harass  these  timid  souls  through  their 
fears  to  sacrifice  their  securities  when  there  is  no  warrant 
for  it. 

Fear  cannot  be  reasoned  with  intelligently.  No  panic 
ever  takes  place  in  which  there  is  not  also  Avitnessed  a  whole- 
sale slaughter  of  frantic  investors,  who,  a  few  months  later, 
keenly  regret  that  their  fears  made  them  throw  their  se- 
curities on  the  market.    It  is  because  of  this  that  I  say  that 

99 


100  LOUIS  GUENTHER 

an  active  market  is  not  essential  to  the  permanent  investor. 
If  the  bonds  he  holds  are  those  of  a  solvent  corporation  and 
sufficiently  secured,  a  decline  in  the  market  price  below 
what  the  security  cost  him,  does  not  impair  his  investment. 
It  must  be  paid  one  hundred  cents  on  the  dollar  when  due. 
In  the  meanwhile,  market  fluctuations  cannot  interfere  with 
the  continuation  of  the  income. 

It  is  security  that  is  most  desirable,  not  a  market,  nor 
should  investors  be  influenced  seriouslv  bv  the  theoretical 
discussion  about  the  increased  production  of  gold  reducinpj 
the  purchasing  power  of  gold,  which  may  affect  the  income 
of  an  investor  in  making  the  return  go  less  further  than  be- 
fore, for  the  income  is  fixed.  "We  are  now  in  this  year  of 
1911  passing  through  a  period  of  liquidation  which  is  again 
bringing  to  a  lower  scale  the  cost  of  living,  by  the  decline 
in  commodities.  All  such  discussions  arc  more  or  less 
theoretical. 


XX.  THE  CHARACTER  OF  AN  ENTERPRISE. 

Over  one  liimdred  million  dollars  annually  are  engulfed 
in  the  whirlpool  of  predatory  finance.  This  is  the  amount 
one  conservative  estimate  places  as  the  tribute  paid  each 
vear  by  credulous  investors  to  the  modernized  American 
confidence  man  who  has  deserted  gold  bricks  and  green 
goods  for  the  more  inviting  opportunities  offered  in  selling 
worthless  shares. 

It  is  difficult  to  explain  how  it  is  that  a  people,  normally 
intelligent  as  a  class,  permit  themselves  to  be  victimized 
each  vear  out  of  such  an  enormous  toll.  Greed  alone  is  not 
responsible  for  their  credulity.  A  more  logical  reason  is 
to  be  found  in  the  great  ignorance  shown  by  the  average 
investor  of  the  character  of  securities.  The  majority  act  up- 
on the  assumption  that  everything  is  right  without  first  in- 
vestigating. They  rest  their  faith  in  the  honesty  of  the  men 
who  are  asking  them  to  invest  their  money.  They  assume 
that  the  public  authorities  would  never  permit  these  men 
to  carry  on  their  business  were  they  aware  beforehand  of 
their  dishonesty  and  that  the  powerful  newspaper  press 
would  never  allow  them  to  use  their  pages  to  advertise  their 
securities  unless  their  backers  were  honest. 

Unfortunately  the  authorities  proceed  upon  the  theory 
that  it  is  none  of  their  business  to  act  upon  the  initiative  or 
that  they  suspect  a  fraud  is  being  perpetrated.  They  con- 
tend that  more  pressing  duties  occupy  their  time  and  they 
cannot  afford  to  investigate  all  the  investment  propositions 
as  soon  as  they  make  their  appearance.  They,  therefore, 
wait  until  a  complaint  is  lodged  with  them  before  bestirring 
themselves  and  in  most  cases  a  swindle  has  by  that  time  gone 
too  far  and  already  the  greater  part  of  the  mischief  has 
been  perpetrated  by  the  time  some  victim  has  become  sus- 

101 


1^2  LOUIS  GUENTHER 

picious  onoii,i!:li  to  lodge  a  complaint.  As  far  as  some  of  our 
powerful  newsixnpers  are  coucenied,  it  is  unfortunate  that 
their  moi'alitv  is  no  more  thaiia  eold  business  morality.  Some 
of  their  puhlishei'S  maintain  that  their  readers  must  exer- 
cise their  own  intelligence  ah<>nt  tlic  investments  offered 
ill  the  advertising  columns.  '^J'hev  sav  thev  do  not  I'ccoui- 
mend  them.  They  require  and  desire  the  large  revenue 
derived  from  illegitimate  financial  advertising,  running 
into  the  thousands  every  year,  and  are  perfectly  willing  to 
salve  their  consciences  bv  assuming  an  innocence  of  knowl- 
edge  as  to  the  real  character  of  the  proposition  offered. 

A  prominent  government  official  has  severely  arraigned 
the  newspapers  which  accept  this  class  of  advertising  for 
their  share  of  the  guilt  in  the  annual  loot  which  the  dishon- 
est investment  proposition  takes  from  the  public.  He  has 
charged  that  these  swindles  could  not  exist  without  the  co- 
o])eration  of  these  newspapers.  P)Ut  this  is  not  all  true. 
The  liberty  to  use  the  mails  for  the  distribution  of  prospect- 
uses, literature  and  letters  is  equally  responsible  for  their 
existence  and  success.  If  the  newspapers  were  not  as  ac- 
cessible as  they  are  these  schemes  would  still  be  carried  on 
through  the  mails. 

If  it  were  possible,  without  encroaching  upon  the  lil)erty 
of  the  i)ress  and  the  use  of  the  mails,  to  bring  about  an  in- 
telligent co-operation  between  the  newspapers  and  the  postal 
authorities  to  surround  investment  pi-opositions  with  ]n'op- 
er  restrictions,  thei-e  can  be  no  qu(^stiou  but  that  the  harm 
they  do  could  be  materially  curbed.  Even  then  unsuspect- 
ing and  uninquiring  investors  cannot  be  wholly  protected 
against  their  own  ignorance.  There  is  but  one  way  for  them 
to  guai'd  themselves  against  outright  swindles  and  this  is 
])y  tlic  cxci-cise  of  a  little  common  intelligence. 

M1ie  brief  investigation  before  investing  will,  in  the  ma- 
ioritv  of  instances,  save  the  investor  his  monev.  But  the 
usual  practice  is  to  invest  first  and  investigate  afterwards. 
At  least  my  experience  in  my  correspondence  with  invest- 


INVESTMENTS  AND  SPECULATION  103 

ors  who  have  bought  doubtful  securities,  shows  this  to  be 
the  tendency.  I  purpose  here  to  outline  some  of  the  essen- 
tial factors  relating  to  ever}"  enterprise  about  which  invest- 
ors should  fully  post  themselves.  If  they  follow  the  course 
laid  down,  there  is  little  chance  of  any  swindles  getting 
their  money. 

The  Nature  of  the  Enterprise. 

It  is  important  to  consider  seriously  the  nature  of  the 
enterprise.  If  its  basis  is  sound,  the  prospect  is  good  for  its 
success  under  a  capable  management.  This  may  be  deter- 
mined by  a  comparison  with  undertakings  of  a  similar  char- 
acter, by  which  it  can  be  showm  if  they  are  profitable  else- 
where. Competition  is  also  an  important  factor  to  con- 
sider. AYliat  sort  of  competition  will  be  met  with  and  what 
degi-ee  of  opposition  must  be  faced?  Has  the  enterprise 
peculiar  advantages  over  others  in  a  similar  line?  This 
should  be  brought  out,  as  well  as  all  the  advantages  indi- 
cating that  the  enterprise  can  be  profitably  conducted  un- 
der existing  conditions.  These  are  the  general  problems  to 
which  investors  would  do  well  to  give  the  first  serious 
thought. 

When  satisfied  in  this  regard,  the  next  step  is  a  careful 
examination  of  the  plan  of  organization.  Corporation  laws 
differ.  Some  states  are  more  liberal  than  others,  some 
states  even  going  so  far  as  to  invite  the  incorporation  of 
enterprises  by  loose  laws,  none  of  which  is  for  the  benefit 
of  the  stockholders. 

The  corporation  laws  of  Maine,  Delaware,  New  Jersey, 
North  Dakota  and  Arizona  are  all  so  framed  as  to  vest  the 
management  of  a  corporation  with  such  discretionary  power 
and  secrecy  that  it  works  the  gi*eatest  harm  to  the  stock- 
holders. The  stricter  the  laws  under  which  an  enterprise 
is  incoiiiorated  the  greater  are  the  interests  of  the  stock- 
holders safeguarded.  The  amount  of  capital  is  very  im- 
portant.   The  more  reasonable,  the  greater  are  the  chances 


104  LOUIS  GUENTHER 

of  success.  No  less  important  is  the  manner  of  the  issu- 
ance of  the  stocks.  Has  it  been  issued  in  whole  or  in  part 
in  return  for  the  property  turned  over  by  the  incoi-pora- 
tors?  If  so,  in  what  proportion  and  for  what  property?  A 
knowledge  of  this  will  throw  some  light  upon  whether  the 
money  of  investors  will  be  used  for  the  exploitation  of  the 
business  of  the  enterprise  or  flow  into  the  pockets  of  the 
promotei'S. 

Is  the  stock  offered  for  sale  full  paid  and  non-assessable? 
It  is  the  law  of  some  states  that  stock  bought  for  less  than 
its  par  value  places  on  shareholders  the  liability  for  the 
difference  in  case  of  insolvency.  Suit  can  be  started  by  the 
creditors  for  the  recovery  of  the  difference.  Corporations 
evade  this  statute  by  turning  over  the  assets  for  the  shares, 
in  this  manner  making  them  full  paid  and  non-assessable. 
Part  of  this  stock,  if  not  the  whole,  is  then  put  into  the 
treasury  to  be  sold  to  secure  working  capital.  It  should  also 
be  determined  whether  any  of  the  stock  has  preference  and 
of  what  this  preference  consists.  Foreknowledge  in  this  re- 
spect is  to  be  fore- warned  against  any  suip rises.  By  know- 
ing what,  if  any,  stock  remains  unissued  and  is  hold  in  the 
treasury,  one  may  tell  the  sources  of  new  revenue  open  to 
the  corporation,  as  new  capital  can  be  raised  as  it  is  needed 
by  the  growih  of  the  business.  A  copy  of  the  by-laws  should 
be  examined  carefully,  as  from  them  the  prospective  share- 
holder can  determine  the  extent  of  the  powers  vested  in  the 
officers  and  directors  of  the  corporation. 

Who  has  the  stock  control?  The  character  of  the  men 
is  such  that  it  can  either  make  or  break  a  coi-poration.  In 
their  hands  rest  the  rights  of  the  smaller  stockholders.  Are 
they  men  whose  past  conduct  in  the  management  of  corpora- 
tions is  such  as  to  assure  that  the  rights  of  the  minority 
shareholders  will  be  fully  maintained?  Finally,  in  the  plan 
of  organization  are  there  any  unusual  features  in  the  char- 
ters of  the  by-laws  which  may  be  employed  in  the  future  to 
the  detriment  of  the  stockholders? 


INVESTMENTS  AND  SPECULATION  105 

Present  Condition  of  the  Enterprise. 

An  examination  in  this  respect  can  be  divided  into  three 
classifications :  First,  into  the  property ;  second,  into  opera- 
tion ;  and  third,  into  the  finance. 

To  begin  with  the  first,  there  is  the  property  or  the  rights 
controlled.  Herein  are  the  elements  of  success.  Has  it  any 
value  and  how  have  the  values  been  estimated?  The  an- 
swer to  this  inquiry  can  determine  the  measure  of  conserva- 
tism or  exaggeration  back  of  the  enterprise. 

If  the  properties  or  rights  are  o'^Tied  outright  the  more 
certain  the  foundation  on  which  the  enterprise  is  being 
built.  Less  assured  is  the  future  where  the  properties  are 
held  under  lease,  license,  grant,  option  or  otherwise,  for  the 
failure  to  comply  with  some  terms  is  liable  to  break  the  con- 
tract and  the  loss  of  the  property.  If  the  property  is  owned 
outright,  the  titles  should  be  perfect.  If  there  are  any  en- 
cumbrances on  the  properties  or  rights,  the  investor  should 
know  it,  and  what  the  amount  is.  If  thev  are  not  owned 
outright,  the  holding  papers  should  be  in  proper  form  and 
it  ought  to  be  known  also  if  the  holding  terms  are  reason- 
able, satisfactory  and  safe.  ^ 

With  all  the  facts  kno^vn,  then  some  ideas  ought  to  be 
formed  as  to  what  the  property  is  likely  to  bring  in  case 
liquidation  is  forced,  and  with  all  these  facts  before  the  in- 
vestor, he  can  form  an  intelligent  conclusion  regarding  the 
present  condition  of  the  enterprise. 

Coming  to  the  second  consideration  as  to  operation,  the 
first  thing  which  should  be  found  out  is :  AVhat  have  been 
the  operations  up  to  the  time  the  investor  is  asked  to  pur- 
chase the  shares?  Then,  what  have  been  the  results  and  to 
what  extent  have  they  proved  profitable?  Another  fact  to 
ascertain  is  whether  difficulties  have  been  encountered,  and, 
if  any,  their  nature.  Find  out  about  the  demand  for  the 
product  or  the  operation  of  the  enterprise  and  what  is  its 
present  status  financially,  as  well  as  physically.    Then,  are 


106  LOUIS  GUENTHER 

the  books  proporly  kept  and  are  they  open  to  the  inspection 
of  the  sliarelioklers? 

The  third  consideration,  and  one  wliich  relates  to  the 
very  heart  of  an  enterprise,  is  the  state  of  the  finances. 
Fii'st,  there  are  the  assets  as  they  exist— their  cliaracter  and 
their  actual  value.  At  least  an  investic^ation  of  the  assets 
will  ixuard  ai^ainst  a  later  discovery  that  thev  are  niostlv  of 
paper  value  and  not  real.  It  is  important  to  have  a  clear 
knowledge  regarding  the  debts,  claims,  fees,  rents,  royalties 
or  other  pa^^nents  or  ol)ligations  due  and  which  must  be 
met. 

Knowing  this,  the  next  step  is  to  ascertain  the  resources 
available,  out  of  which  these  debts  are  to  be  paid.  Who 
handles  the  money  and  what  safeguards  are  provided  to 
prevent  improper  disbursements?  It  is  also  important  to 
know  what,  at  present,  the  running  expenses  are  and  what 
they  are  likely  to  be,  including  the  salaries  of  the  officers 
and  managers,  to  ascertain  whether  these  important  outlays 
are  upon  a  consei'^^ative  basis. 

Then  there  are  the  directors.  "Who  are  they?  A\'liat 
is  the  past  record  and  present  business  standing  of 
each?  VTho  are  the  active  members  of  the  board?  AVho, 
if  any,  are  inactive?  Are  the  meetings  held  regularly  and 
are  they  fully  attended?  VTlw  compose  the  executive  com- 
mittee, if  any,  and  what  are  their  powers?  Above  all  it 
should  be  ascertained  if  the  directors  are  stockholders  io  a 
material  amount.  It  is  but  reasonable  to  suppose  that  if 
they  are  financially  interested  in  the  prosperity  of  a  cor- 
poration, the  more  conservative  will  their  management  be. 

Who  ar<'  the  ofReors?  '\Miat  are  their  previous  reeovds? 
What  are  theii*  special  present  qualiti(^ati(^ns?  Are  they 
able  to  Work  togethei*  without  friction?  What  conipensa- 
ti(tn  do  thev  receive  or  are  thev  to  receive,  and  are  thev  in- 
terested  in  the  enterprise  beyond  their  salaries?  What  is 
the  general  ]>lan  of  o])erations  they  have  majiped  out  for 
themselves  and  what  led  to  their  adoption? 


INVESTMENTS  AND  SPECULATION  107 

Some  General  Questions. 

With  a  clear  intelligence  regarding  the  above  problems, 
there  still  remain  some  general  features  which  should  be 
thoroughly  investigated.  Serious  consideration  should  be 
accorded  to  the  previous  history  of  the  enterprise  or  the 
property  or  undertakings  on  which  it  is  based.  If  inven- 
tions enter  prominently,  what  is  the  previous  record  of  the 
inventor?  By  whom  are  the  statements  made,  and  is  the 
party  making  them  reliable?  Finally,  are  there  any  con- 
tracts or  obligations  not  now  effective  by  which  the  enter- 
prise may  subsequently  be  effected? 

With  all  these  facts  before  the  investor  and  carefully 
considered,  he  is  at  least  assured  against  falling  a  prey  to 
any  financial  sharps.  Neither  they  nor  theii'  enterprises 
could  furnish  a  clean  bill  of  health  where  probed  by  an  ex- 
amination as  thorough  as  assured  by  the  different  ques- 
tions outlined  in  this  section.  While  they  are  by  no  means 
a  complete  assurance  against  loss,  as  an  honest  enterprise 
mi<iht  meet  with  difficulties  and  manv  have,  thev  do  raise 
sufficient  safeguards  against  downright  dishonesty.  In 
conclusion,  it  may  be  said  that  the  investor  should  demand 
before  parting  with  a  penny  of  his  money,  a  complete  finan- 
cial statement,  including  item  by  item  the  assets  and  the 
liabilities,  the  earnings  and  the  expenses,  of  a  going  con- 
cern. In  another  section,  a  specimen  statement  is  subnutted 
to  demonstrate  how  figures  sometime  can  be  made  to  lie  in 
a  way  to  do  credit  to  a  Baron  ^Munchausen. 

If  investors  will  conduct  an  investigation  such  as  has 
been  here  proposed,  there  will  be  veiy  few  who  will,  by  the 
exercise  of  a  little  bit  of  intelligence,  have  ciiuse  to  com- 
plain that  they  have  been  victimized.  They  vnW  have  locked 
the  stable  door  before  the  horse  has  been  stolen. 

Swindlers  operating  in  the  financial  field  are  unable  to 
reply  properly  to  all  these  questions  and  even  should  they, 
their  answers  would  not  hold  together  well.    Discrepancies 


108  LOUIS  GUENTHER 

would  show  themselves  here  and  there  so  glaringly  as  to  at 
once  eliminate  their  proposition  from  the  consideration  of 
intelligent  investors. 

It  is  possible  to  deceive  a  person  with  one  lie,  but  a  half 
dozen  or  more  lies  will  not  stick  together.  In  fact,  conserva- 
tive 1)ankers  employ  this  searching  investigation  to  deter- 
mine to  their  satisfaction,  the  character  and  possibilities  of 
an  enterprise  proposed  to  them  to  underwrite  its  securities. 
If  they  depend  upon  this  information,  why  should  not  in- 
vestors ? 


XXI.     SCIENCE  OF  SPECULATION. 

Call  it  what  you  will,  speculation  will  always  be  with  us. 
Prudes  may  fro\\Ti  upon  it,  superficial  thinkers  may  con- 
fuse it  with  the  commonest  forms  of  gambling,  and  sociol- 
Qo-ists  mav  dream  of  the  dav  when  envy,  aml)ition  and  cove- 
tousness  will  be  a  thing  of  the  past  and  the  human  race  can 
exist  in  peace  without  these  human  traits,  but  their  agita- 
tions and  outcries  can  no  more  check  speculation  than  hu- 
man ingenuity  can  devise  a  scheme  to  control  the  tides. 

AVhat  the  blood  is  to  the  human  body,  speculation  is  to 
business.  It  is  absolutely  a  necessary  part  of  it.  The  only 
difference,  if  there  is  at  all  a  diff'erence,  is  in  the  form  it  as- 
sumes. AVhat  would  business  be  without  incentive  ?  In  fact 
incentive  is  all  there  is  at  the  bottom  of  speculation.  ]\[en 
are  willing  to  take  risks  to  acquire  wealth.  They  are  willing 
to  stake  their  capital  upon  opportunities  which  appeal  to 
their  judgment. 

From  the  pioneer  who  heedlessly  plunges  into  a  track- 
less waste  to  find  a  new  home  with  greater  opportunities 
for  the  acquisition  of  wealth,  to  the  modern  capitalist,  who, 
to  control  the  trade  in  a  given  conmiodity,  plans  gigantic 
trusts,  is  a  long  line  of  speculators,  as  speculation  is  be- 
hind all  their  ambitions.  The  inventor  who  is,  apparently, 
of  all  men  the  least  of  speculators,  takes  greatest  specula- 
tive chances,  for  he  uses  up  time  and  energy  to  shape  his 
ideas  into  some  form  where  they  can  be  of  practical  use  and 
should  he  fail  has  wasted  them  utterly  and  lost  all. 

Illustration  after  illustration  could  be  given  to  demon- 
strate how  speculation  in  a  greater  of  less  degree  enters  in- 
to the  material  welfare  of  each  individual. 

"Without  speculation  no  business  could  progress.  It  is 
the  d^Tiamic  power  behind  every  incentive  to  activity  and 

109 


110  LOUIS  GUENTHER 

procuress.  It  is  the  desire  for  gain  wliicli  prompts  the  ineep- 
tioii  of  every  veiitinc  If  it  is  all  that,  then  it  can  be  read- 
ily seen  licw  necessary  speculation  is.  In  fact,  speculation 
in  its  hiiihest  form  has  shaped  the  course  of  history  and 
often  changed  the  map  of  the  world. 

While  the  discovery  of  America  bv  Cohnnbus  was  acci- 
dental,  the  real  jiurpose  behind  his  venturesome  journey  was 
to  find  a  shorter  route  to  India.  After  he  found  a  new  hem- 
isj)here  his  discovery  inflamed  the  spirit  of  conquest  among 
numerous  intrepid  explorers,  few  of  whom  set  out  upon 
their  expeditions  with  any  thought  of  planting  their  coun- 
try's standard  over  new"  territory  for  the  mere  sake  of 
fame.  JMost  all  of  them  w^ent  hunting  for  new  treasures  and 
to  expand  the  commerce  of  their  nations.  Cortez  was  only 
a  looter.  He  and  his  soldiers  despoiled  ^lontezuma  and  the 
Incas  of  their  treasure  for  his  king,  himself  and  his  men. 
Pizarro  did  the  same.  The  Indians,  our  real  Americans, 
were  not  originally  blood-tliirsty  savages,  but  a  peaceal^le 
race  of  primitive  men  who  welcomed  the  appearance  of  the 
white  men  among  them.  Their  friendship  was  only  turned 
into  hate  wdien  thej^  began  to  realize  that  the  white  man 
came  among  them  solely  to  WTest  their  land  and  posses- 
sions from  them. 

Behind  most  wars  among  nations  tliere  is  the  connnercial 
instinct.  This  is  but  another  form  of  speculation,  except 
on  its  grandest  scale.  Instead  of  between  individuals  it  is 
])etween  nations  that  a  rivalry  for  acquisition  exists  and  this 
rivalry  clashes  to  a  point  where  it  arouses  the  martial  spirit 
of  a  race  to  acquire  by  force  of  arms  what  cannot  be  secured 
by  i)i'a(M'rul  measures. 

Wci-c  it  not  for  the  rich  diamond  mines  at  Kimbci'ly 
and  the  gold  mines  of  dnlminiesburg  in  South  Africa,  there 
never  would  have  been  such  a  historical  event  as  the  Boer 
AVnr.  It  was  not  an  insult  upon  English  pride  wliich 
prom])tc(l  John  Bull  to  si)end  over  a  billion  dollars  to  hum- 
ble the  hardy  dutch  nation  under  Krueger,  but  the  posses- 


INVESTMENTS  AND  SPECULATION  111 

sion  of  the  rich  mines  was  the  real  goal.  But  once  the  con- 
flict was  on,  national  pride  forced  the  English  nation  to 
carry  it  to  a  victorious  end,  whatever  the  cost.    Tlie  same 

*  - 

cause,  the  retention  of  India  under  the  British  flag,  brought 
about  the  Sepoy  mutiny. 

Going  back  further  into  the  history  of  England,  the  loss 
of  her  American  colonies  is  directly  traceable  to  the  greed 
of  her  capitalists.  Out  of  their  enlarged  opportunities  they 
wanted  to  get  all  their  was  possible  despite  the  danger  of 
trespassing  by  their  heavy  exactions  upon  the  peaceable 
nature  of  the  colonists.  The  tea  tax  was  the  spark  which  set 
aflame  the  American  revolution. 

No  tax  can  be  construed  as  a  patriotic  measure.  It  is 
a  scheme  for  material  aggrandizement.  George  III,  to 
enrich  the  exchequer  of  his  nation  and  indirectly  the  per- 
sonal fortunes  of  his  subjects,  attempted  to  do  it  by  forc- 
ing the  colony  in  America  to  pay  his  country  a  greater  trib- 
ute. For  his  efforts  to  lay  hands  on  more  money,  England 
lost  an  important  colony.  What,  then,  was  this  war,  when 
stripped  of  all  its  romanticism,  but  the  result  of  specula- 
tion'?   It  was  a  case  of  a  nation's  greed  overstepping  itself. 

And  so  it  was  in  the  late  war  between  Japan  and  Russia. 
Patriotism  and  national  ])i-ide  had  no  share  in  bringing 
about  this  conflict.  Rich  Manchuria  and  the  possession  of 
Corea,  which  also  meant  the  dominance  over  the  commerce 
of  China,  were  at  the  bottom  of  the  conflict.  Japan  wanted 
this  enormous  business.  Russia  was  equally  covetous.  It 
was  therefore  inevitable  that  the  friction  between  the  two 
nations,  wholly  the  outcome  of  their  commercial  expan- 
sion, could  be  settled  only  by  war  and  the  prize  fall  to  the 
victor  after  sacriflcing  many  hundred  thousands  of  lives 
and  piling  up  a  huge  war  debt  for  each  as  a  heritage  for 
many  future  generations. 

What  is  true  of  nations  is  also  true  of  individuals.  They 
seek  greater  opportunities  to  make  money.  Between  in- 
dividuals their  interests  when  they  conflict  are  fought  out 


112  LOUIS  GUENTHER 

in  the  arcDa  of  competition.  The  mastery  falls  to  those  who 
are  the  shrewder  and  more  aggressive  contenders.  Yet  be- 
neath the  outward  semblance  of  competition  is  the  greater 
force— speculation.  We  cannot  get  away  from  it.  AVher- 
cver  wo  turn  we  are  brought  face  to  face  with  it. 

By  no  moans,  either,  is  speculation  in  any  sense  a  mod- 
ei-n  force.  It  is  as  old  as  the  human  race.  Only  when  the 
luinian  race  no  longer  exists  will  speculation  become  extinct. 

Our  own  Bible  bi'ings  down  to  us  the  tradition  of  how 
Joseph  bought  up  all  the  wheat  in  Egypt  l)ecause  ho  shrewd- 
ly detected  there  would  be  a  famine  in  the  land.  AVhat  was 
this  but  speculation?  In  reality  Joseph  was  the  tirst  man 
we  know  of  to  corner  wheat.  Nowadays  men  speculate 
in  the  same  cereal.  They  watch  the  weather  map  care- 
fully and  spend  considerable  money  each  year  gathering 
statistics  in  an  endeavor  to  form  an  idea  as  to  the  extent 
of  the  harvest.  As  they  form  their  opinions  they  trade  in 
the  wheat  long  before  it  is  out  of  the  ground  and  ready 
for  the  market.  They  buy  if  they  believe  the  crop  will  fall 
short,  to  resell  it  later  at  a  higher  market  price,  or  if,  on 
the  other  hand,  they  arrive  at  the  conclusion  that  the  crop 
will  be  plentiful,  they  sell  it  in  anticipation  of  a  decline  in 
the  price  expecting  to  reimburse  themselves  frc^m  the  dif- 
ference in  the  price  they  agreed  to  deliver  it  for  months 
previous  to  the  harvest  and  the  lower  price.  If  they  are 
mistaken  in  their  judgment,  they,  of  course,  are  out  of 
pookot.  The  only  difference  between  their  trading  and  that 
of  Joseph  is  that  whereas  he  bought  the  wheat  outright, 
they  deal  in  contracts  without  ever  seeing  the  cereal. 

Guglielmo  Ferraro,  the  great  modern  Italian  historian, 
in  his  fascinating  history  of  "The  Greatness  and  Decline 
of  Rome,"  gives  a  very  interesting  account  of  how  specu- 
lation was  at  the  very  bottom  of  most  of  the  conquests  of 
the  Roman  legionaries  over  the  other  barbaric  nations  and 
to  many  it  may  be  exceedingly  interesting  to  know  that  for 
nearlv  a  centurv  before  the  birth  of  Christ,  the  Romans  were 


INVESTMENTS  AND  SPECULATION  113 

already  bining  shares  in  large  land  operations  which  were 
carried  on  throughout  the  colonies  of  Rome.  So  even  the 
buying  of  shares,  regarded  as  a  modern  evolution,  is  by  no 
means  new. 

Lucullus,  Rome's  first  great  expansionist,  inaugurated 
the  fashion.  His  conquest  of  Mithridates  first  oj^ened 
the  eyes  of  the  Romans  to  the  luxuries  and  refinement  of 
the  East.  The  talents  and  sesterces  he  brought  back  to 
Rome  incited  in  the  Roman  aristocracy  the  lust  for  greater 
conquest.  The  rich  money  lenders  were  prompted  to  fi- 
nance the  expeditions  and  the  ambitions  of  the  Roman  war 
lords.  Pompey  conquered  other  nations,  turning  over  their 
rich  lands  to  the  powerful  Italian  land  operators,  who  in 
turn  invited  the  smaller  speculators  to  join  them  in  their 
extensive  operations.  Caesar  continued  Rome's  policy  of 
conquest  in  Gaul  and  Britain.  Behind  all  his  w^ars  was  the 
sordid  object  of  enriching  himself  and  his  followers  with 
the  tributes  exacted  from  the  smaller  and  weaker  tribes 
which  his  legions  subdued— all  for  one  object,  to  extend 
the  wealth  of  Rome,  to  give  the  speculators  a  greater  field 
for  their  operations. 

Thus  it  is  seen  that  we  have  many  historical  precedents 
to  justify  speculation.  More  than  this,  they  indicate  that 
behind  each  step  of  progress  the  human  race  has  made, 
speculation  has  been  the  impelling  force  and  modern  con- 
ditions have  changed  it  but  slightly. 

What,  however,  is  the  science  of  speculation  ?  AYe  often 
hear  of  this  appellation  being  applied  to  it.  Roughly  speak- 
ing, to  me  there  does  not  seem  to  be  anything  like  a  science 
of  speculation,  in  the  sense  that  we  are  accustomed  to  use 
the  term,  beyond  a  few  general  though  uncertain  rules. 
There  is  a  science  of  chemistiy.  The  knowledge  gained  of 
it  can  be  verified  by  exact  observation.  Certain  conclusions 
can  be  demonstrated  beyond  peradventure  by  obtaining  the 
exact  result  which  an  investigator  sets  out  to  obtain.  There 
is  an  exact  science  in  astronomy,  in  medical  research,  in 

B.VII— 8 


114  LOUIS  GUENTHER 

pooinetry,  in  inctcorulogy,  and  in  nicta})liysics.  Knowledge 
of  laws  and  rules  must  first  be  acquired  to  prepare  a  pei'son 
to  undertake  iiroficiently  the  study  in  these  sciences. 

But  I  should  like  to  ask  hr»w  any  course  of  study  in  spec- 
ulation could  be  outlined  on  which  reliance  can  be  placed. 
Familiarity  with  the  objects  engaging  one's  speculative 
instincts  of  course  are  aljs<»lutely  essential  to  success.  A 
general  knowledge  of  conditions  helps  considerably  when 
coupled  with  a  keen  perception  of  what  their  effects  are 
likelv  to  be,  but  as  these  conditions  constantly  yryv,  there 
is  no  way  by  which  a  knowledge  of  them  can  be  verified  Ijy 
exact  observation. 

Possibly  vuu  have  seen  at  some  time  or  another,  a  chart 
indicating  the  trend  of  the  stock  or  grain  markets.  A  piece 
of  paper  squared  off  in  blocks,  each  row  representing  a 
cvcle  of  time,  most  usuallv  a  vear,  and  across  these  bh^cks 
there  will  be  a  wa^T  line  running  either  htncritudinallv  or 
perpendicularly.  This  line  is  supposed  to  trace  the  trend  of 
vnices.  Such  charts  have  manv  followers  who  foolishlv  be- 
lieve  they  can  replace  judgment  with  a  greater  degree  of 
accuracy.  But  they  more  frequently  go  wrong  than  they 
prove  right.  They  might  be  accurate  guides  were  similar 
conditions  present,  when  the  charts  would  indicate  a  re- 
currence in  a  swing  in  prices  upward  or  do^^Tlward  as  the 
case  might  be,  but  this  is  not  always  the  case,  fate  having 
a  strange  inconsistency  in  bringing  forward  miexpected 
events  which  wholly  change  the  course  of  human  expecta- 
tions. 

l*revious  to  the  sharp  ]ianic  of  1907  the  concensus  of 
opinion  among  our  great  millionaires  who  accumulated 
their  vast  wealth  as  a  result  of  the  unusual  period  of  pros- 
perity which  set  in  with  the  election  of  William  ^FcKinley 
as  President,  was  that  the  country  had  not  vet  exhaust(>d 
the  good  times.  Shrewd  men  like  Henry  H.  Rogers,  AVil- 
liam  A.  Pockefeller  and  others  equally  powerful,  were  con- 
firmed bulls  on  the  country  and  backed  their  faith  of  much 


INVESTMENTS  AND  SPECULATION  115 

liigliei"  prices  for  the  leading  securities  listed  on  the  New 
York  Stock  Exchange  by  accumulating  vast  blocks  of 
shares. 

According  to  the  signs  of  the  charts,  their  position  was 
correct.  The  flood  tide  in  the  prices  of  stocks  had  not  been 
reached.  But  without  a  visible  sign  of  a  lowering  cloud 
in  the  business  horizon,  a  fatality  occurred  which  rent  asun- 
der all  their  well-laid  plans  and  involved  them  in  huge 
losses.  The  panic  of  1907  came  unheralded  by  any  of  those 
advance  signs  which  in  the  ordinary  course  of  events  cast 
their  shadows  before  the  eyes  of  shrewd  students  of  condi- 
tions. 

That  fatality  was  the  San  Francisco  earthquake.  It 
came  like  a  bolt  from  a  clear  sky.  The  destruction  of  over 
$200,000,000  of  actual  wealth  proved  like  a  vacuum  bursting, 
in  which  money  required  elsewhere  had  to  rush  in,  to 
mitigate  human  suffering  and  prevent  the  total  ruin  of 
fortunes  invested  in  the  stricken  citv.  It  found  the  credit 
structure  of  the  moneyed  centers  in  the  country  in  a  vul- 
nerable position.  No  money  in  large  volume  could  readily 
be  spared  within  so  shoii;  notice  without  withdrawal  from 
other  channels  and  as  the  necessity  was  most  urgent,  sacri- 
fice had  to  be  made  by  letting  go  of  the  more  quickly  sale- 
able assets,  which  were  securities.  The  earthquake  caused 
the  panic ;  that  was  unexpected. 

Another  indication  that  there  is  no  accuracy  to  specu- 
lation is  the  explosion  of  the  theory  regarding  the  recur- 
rence of  panics.  For  some  years  we  have  held  to  the  belief 
that  between  panics  an  interval  of  about  twenty  years 
elapses.  But  of  late,  money  panics  have  occurred  with 
greater  frequency.  From  1900  to  1910  there  were  two 
panics,  varying  in  degree  of  intensity. 

If  it  were  at  all  possible  to  gauge  accurately  beforehand 
the  years  in  which  we  are  to  see  great  prosperity  and  then 
adversitv,  there  would  be  hardlv  anv  necessitv  for  the  exer- 
cise  of  the  keener  perception  upon  which  successful  spec- 


116  LOUIS  GUENTHER 

Illation  must  depend  for  a  profitable  fruition.  All  that 
would  be  needed  is  to  watch  for  the  unfailing  signs  and  tlien 
trim  sails  accordingly. 

Another  fallacy  we  often  fall  into,  is  the  belief  that  a 
panic  in  Wall  Street  is  a  localized  affair  and  cannot  dis- 
turb the  prosperity  of  the  country.  AVe  have  seen  an  im- 
pression extant  something  akin  to  this  durincr  1907.  Other 
parts  of  the  country  were  confident  they  would  not  foci  the 
effect  and  the  press  was  particularly  concerned  in  point- 
ing editorially  to  reasons  explaining  and  emphasizing  this 
view.  But  it  was  not  six  months  afterwards  before  the  en- 
tire country  was  in  the  grip  of  the  depression  the  panic 
superinduced.  In  a  few^  months  the  banks  in  the  large  in- 
terior cities  were  forced,  because  of  the  scarcitv  of  monev, 
to  resort  to  clearing-house  certificates  as  a  measure  to  re- 
lieve the  stringency. 

Money  has  its  capital  centers  in  each  country.  As  money 
is  the  basis  of  credit  and  is  also  the  life  fluid  of  business, 
it  cannot  be  otherwise  than  that  the  prosperity  of  a  coun- 
try will  be  disturbed  and  checked  when  there  occurs  a  ]">anic 
in  the  principal  money  centers.  Then  a  condition  of 
atrophy  is  brought  about.  Business  receives  a  swift  check, 
almost  always  unexpectedly  and  when  least  prepared  for  it. 

Sometimes  a  panic  is  brought  about  by  the  most  unusual 
occurrences.  At  times  it  comes  by  the  most  unexpected 
happenings  and  the  direct  cause  will  always  be  found  in 
the  over-extension  of  speculation. 

One  instance  I  have  in  mind  was  the  sudden  death  of 
Governor  Roswell  P.  Flower,  who  was  a  great  market  fac- 
tor and  who,  because  of  his  unusual  success  as  a  specula- 
tor, had  behind  him  a  great  following  in  the  securities  in 
which  it  was  known  he  w^as  most  largely  interested.  His 
death,  overnight,  paralyzed  his  following.  They  were 
thro^^^l  in  a  panic  of  fear  by  the  sudden  loss  of  their  leader. 
What  were  imposing  fortunes  the  day  before  were  swept 
away  as  if  by  a  tidal  wave,  and  in  place  of  the  wealth  there 


INVESTMENTS  AND  SPECULATION  117 

was  ruin,  on  the  day  following,  to  thousands  of  specula- 
tors, caused  by  the  sheer  and  heartsickening  decline  in 
prices  of  securities. 

Another  similar  case  of  the  unexpected,  but  this  time 
not  from  the  death  of  a  great  financial  captain,  was  the 
memorable  flurry  in  Xorthern  Pacific  stock  as  a  result  of 
the  Titanic  struggle  for  control  of  this  important  railroad 
system  between  E.  H.  Harriman  and  his  banking  ally,  the 
great  banking  house  of  Kuhn  Loeb  &  Co.,  on  one  side,  and 
James  J.  Hill,  backed  by  no  less  a  great  banker  than  J. 
Pierpont  Morgan,  on  the  other,  Northei'n  Pacific  shot  up 
to  $1,000  a  share.  Were  it  not  for  a  private  settlement  on 
the  price  after  peace  was  again  restored  between  the  two 
rival  factions,  the  financial  district  w^ould  have  been  a  mass 
of  wreckage,  since  but  little  of  the  stock  sold  under  con- 
tract to  deliver  next  day  was  obtainable,  as  the  control  was 
held  tightly  by  Plill  and  Morgan. 

Jay  Gould's  efforts  to  corner  gold,  when  gold  in  Wall 
Street  was  still  considerable  of  a  speculative  commodity 
and  there  was  a  room  in  the  Stock  Exchange  set  aside  for 
traders  in  it  and  known  as  the  Gold  Room,  brought  Black 
Fridav,  one  of  the  blackest  davs  in  our  financial  annals. 

These  illustrations  will  confirm  the  contention  I  make 
that  it  is  the  unexpected  which  changes  the  course  of  specu- 
lation. It  is  the  unexpected  against  which  no  precaution 
can  be  taken.  To  the  lay  mind  it  will  be  somewhat  puzzling 
how  the  effect  can  be  so  ruinous.  With  a  little  clearer 
knowledge  in  the  rough  of  how  speculation  is  carried  on  it 
will  be  more  readilv  understood. 

Most  speculators  do  not  buy  outright,  that  is,  with  their 
o^vn  money.  They  usually  operate  on  margins.  That  is, 
they  will  buy  a  block  of  stock,  it  can  be  wheat,  cotton  or 
something  else  just  as  well,  through  a  broker,  paying  a  cer- 
tain percentage  of  the  purchase  price  and  leaving  it  to  the 
broker  to  arrange  a  loan  with  his  bank  for  the  balance.  On 
this  balance  the  speculator  pays  interest. 


118  LOUIS  GUENTHER 

As  the  stock  declines  he  is  forced  to  protect  his  equity 
ill  tlie  stock  ]\v  ]nittin^  up  more  money  or  iiiarj^in,  and  if 
lie  has  not  the  cai)ita1  or  comes  to  the  couclusi(Hi  that  the 
decline  will  continui'  and  does  not  c^ire  to  run  the  risk  of 
fui-ther  loss,  he  sells  out  or  is  sold  out,  the  bank  liquidates 
its  loan,  the  })roker  deducts  his  commission,  and  if  there  is 
nnythini::  left,  tlie  speculator  .uets  the  Italance.  If  he  is  in 
deht  heyoiid  his  niarixin  he  must  make  the  difference  good. 
P>ut  it  seldom  reaches  this  point,  as  the  loans  made  are  care- 
fully watched  and  closed  ere  the  lender's  margin  is  ex- 
hausted. 

In  i)anics,  or  when  the  unexpected  ha])pens,  the  change 
in  ])rices  occurs  so  swiftly  and  suddenly  that  often  the  spec- 
ulator has  no  time  to  protect  liims(>lf  before  his  loans  are 
liquidated  as  a  matter  of  precaution.  As  for  the  outright 
holders  of  securities,  thev  are  harassed  hv  fear  to  unload 
to  prevent  further  losses.  In  such  times  securities  are  reck- 
lessly thro\\Ti  upon  the  market  from  all  sides,  and  prices 
smash. 


XXTI.     EFFORTS  TO  PREYFXT  RPECULATIOX. 

There  breaks  forth  periodically  from  prudish,  but  woll- 
mcaniug  jocople,  jDrotcsts  against  all  forms  of  speculation 
in  stocks  or  commodities.  Appeals  are  made  regularly  to 
the  legislative  arm  of  the  Government  to  put  a  stop  to  spec- 
ulation through  the  enactment  of  repressive  laws.  These 
out-bursts  of  public  temper  usually  arise  out  of  a  specula- 
tive debauch  or  directly  result  from  abnormally  high  prices, 
which  speculators  are  charged  with  bringing  about. 

These  outcries  are  typical  of  restless  human  nature. 
The  public  as  a  whole  sometimes  acts  as  one  big  machine, 
permitting  itself  to  be  propelled  unthinkingly  hither  and 
thither  by  some  forceful  leader  or  set  of  agitators  who  mo- 
mentarily have  caught  the  popular  fancy.  These  risings 
are  sometimes  successful  and  laws  to  curb  or  wholly  sup- 
press speculation  are  framed. 

Nor  is  this  aroused  state  wholly  a  characteristic  of  the 
American  people,  who  are,  an^^way,  a  cosmopolitan  nation 
made  up  of  many  races.  It  breaks  forth  among  the  peoples 
of  other  nations.  The  Gemians,  stolid  as  they  are,  rebelled 
against  the  speculation  in  grain,  claiming  it  enriched  only 
the  millers  and  placed  a  heavy  burden  upon  consumers.  A 
gi'eat  outcry  arose  in  Holland  following  the  insane  spec- 
ulation in  tulips  centuries  ago.  England  felt  the  clamor 
frequently  and  most  pronouncedly  after  the  collapse  of  the 
South  Sea  bubble,  while  France  was  rent  with  the  protest 
of  the  populace  against  speculation  twice,  in  a  way  t(t  be- 
come historic:  The  first  time,  when  John  Eaw's  grandiose 
Mississip])i  ])ubl)le  ])urst,  and  the  othci-,  when  the  De  Les- 
seps  Panama  Canal  scheme  smashed. 

With  us,  a  year  hardly  passes  but  that  there  is  intro- 
duced either  in  Congress  or  in  the  assemblies  of  our  dif- 

119 


120  LOUIS  GUENTHER 

fercnt  states,  laws  to  stop  margin-trading,  as  speculation 
in  stocks  is  called,  or  dealing  in  options,  either  in  grain  or 
cotton.  But  up  to  the  present  time  no  laws  have  been  en- 
acted to  interfere  seriously  with  speculation.  Our  more 
sober  intelligence  has  so  far  checked  any  attempt  to  con- 
struct bars  against  a  practice  which  serious  thinkers  real- 
ize is  the  very  incentive  of  our  material  progress. 

Germany  once  succeeded  in  stopping  speculation  in 
grain.  The  farmers  and  the  consumers  soon  felt,  as  a  re- 
sult, that  the  burden  fell  upon  them  and  not  upon  the 
traders,  who  formerlv  dealt  in  this  commoditv  on  the 
Bourse.  Without  a  public  market  on  which  a  price  for 
their  gi*ain  could  be  made  through  free  and  open  barter- 
ing, the  farmers  had  to  sell  for  any  price  they  could  get  and 
never  knew  whether  the  price  was  standard.  The  millers 
had  the  price-making  power  for  flour  wholly  within  their 
control.  It  was  not  long  before  the  Germans  were  equally 
as  anxious  for  the  restoration  of  trading  in  grain  on  the 
Bourse  as  thev  were  a  few  vears  before  to  i)ut  it  dowTi  bv 
force  of  law. 

The  rise  in  public  opinion  against  speculation  has  its 
counterpart  in  similar  demonstrations  against  the  liquor 
traffic  and  yet  wherever  the  law  has  succeeded  in  driving 
liquor  out  of  a  community,  statistics  have  proved  the  pres- 
ence of  a  greater  number  of  inelu'iates  than  when  the  traffic 
was  allowed  to  be  carried  on  in  moderation  and  under  the 
supervision  of  the  authorities. 

The  minister  of  the  gospel  from  his  pulpit  thunders 
against  the  evils  of  speculation  with  no  less  vigor  than  he 
portrays  all  the  sins  of  the  flesh  for  which  Demon  Drink  is 
responsi])le.  As  they  are  popular  themes  they  lend  them- 
selves readily  to  the  eloquence  of  orators.  Nor  is  this  all : 
Blind  ignorance,  greed  and  rashness  are  responsible  for 
many  unfortunate  victims  of  each  of  these  twin  evils  in 
their  eyes;  therefore,  they  have  many  shining  targets  upon 
which  to  aim  their  shafts  of  invective. 


INVESTMENTS  AND  SPECULATION  121 

But  the  deeper  and  more  tolerant  thinker  peers  be- 
neath the  superficial  exterior  and  sees  there  a  plausible  and 
justifiable  reason  for  the  use  of  liquor.  Wine  and  beer  used 
in  moderation  never  harmed  a  race.  The  Germans  are  no 
less  virtuous  than  any  other  race  because  their  favorite 
beverage  is  beer.  The  only  difference  is  that  their  liking 
for  this  mild  drink  has  been  kept  within  the  bounds  of 
moderation.  The  corrective  against  the  evils  of  intemper- 
ance lies  in  education  in  pointing  out  the  harm  which  comes 
from  over-indulgence.  Laws  cannot  be  relied  upon  to  curb 
the  appetite. 

With  speculation  it  is  much  the  same.  Intelligent  spec- 
ulation is  no  crime.  It  is  not  gambling.  It  is  merely  pit- 
ting human  shrewdness  against  the  uncertainties  of  the  fu- 
ture. For  that  matter,  life  itself  is  a  speculation  in  which 
ministers,  prudes  and  agitators  hope  to  avoid  sickness  and 
accident  and  live  their  allotted  span  of  life.  Between  spec- 
ulation and  gambling  there  is  as  much  difference  as  there  is 
between  night  and  day.  Speculation  commands  the  exer- 
cise of  the  greatest  measure  of  acumen,  where  gam])liug 
trusts  ever}i:hing  to  luck  and  the  turn  of  a  card. 

Experience  has  demonstrated  far  too  convincingly  that 
wherever  speculation  has  been  leashed  by  the  iron  bonds 
of  the  law,  the  effect  has  been  almost  an  immediate  stop- 
page in  the  material  progress  of  the  country.  Market  places 
where  average  prices  are  created  are  destroyed,  which  in  it- 
self is  a  great  detriment,  as  the  sellers  cannot  know  whether 
or  not  the  buyers  are  paying  them  a  fair  price  for  their  pro- 
ducts. 

Almost  Everyone  Speculates. 

A  man  believes  that  a  corner  store  in  his  neighborhood 
is  a  good  location  for  a  dry  goods  business.  He  leases  the 
store  for  a  year  or  a  teiTn  of  years  at  a  good  rental.  He 
contracts  for  a  large  bill  of  goods.  He  has  his  store  sub- 
stantiallv  fitted  out.    In  fact  he  has  invested  considerable 


122  LOUIS  GUENTHER 

nioiK y  in  his  cnti'ipiisc  and  made  himself  liable  to  whole- 
sale merchants  for  a  stiff  V)ill  of  goods,  before  he  has  even 
sold  a  paper  of  needles,  all  Ix'eanse  he  has  arrived  at  the  con- 
clusion that  the  location  he  has  selected  for  his  business 
is  favoral)le  for  the  d('velo]iment  of  a  good  trade.  Xo  one 
would  dare  charge  liim  with  speculation.  If  any  one  did 
so,  that  man  would  be  regarded  as  a  hare-brained  crank. 
Yet  the  storekeeper  is  speculating  just  as  much  as  if  he  had 
V)ought  so  many  shares  of  a  stock  whose  earnings  would 
justify  the  belief  that  there  would  be  an  enhancement  in 
value.  If  ]»eople  failed  to  patronize  his  store,  and  if  sales 
were  insufficient  to  bring  a  profit,  he  would  have  to  suffer 
losses  represented  in  the  difference  between  what  this  stock 
brings  and  what  it  cost,  and  his  loss  of  time  and  rent  until 
he  could  rent  the  store  to  some  one  else  before  the  expiration 
of  his  lease. 

Fond  parents,  when  they  send  their  children  to  college 
to  acquire  an  education  to  fit  them  for  their  struggle  of 
existence,  may  not  realize  that  when  they  invest  their  money 
upon  the  education  of  their  loved  ones,  they  are  speculat- 
ing upon  the  children's  using  the  opportunity  pro]>erly. 
Their  boy  or  girl  may  absolutely  waste  the  opportunity 
in  frivolities  and  leave  college  even  less  fitted  for  life's 
battle  than  other  young  people  whose  parents'  circum- 
stances were  such  as  to  make  it  impossible  for  them  to  ob- 
tain a  c(tllege  education. 

A  tailor  cannot  tell  when  he  is  laying  in  a  stock  (^f 
woolens  whether  they  will  meet  the  publie  taste.  Tic  de- 
pends entirely  upon  his  judgment  when  placing  his  orders, 
which  he  does  months  before  the  season  has  set  in.  Is  he  not 
speculatiTig? 

Whv,  even  the  grocer  speculates  when  in  the  early  morn- 
ing he  drives  his  wagon  to  the  market  for  his  daily  sup]")ly 
of  greens,  vegetables  and  dairy  ]iroducts.  R<1  does  the 
butcher  in  his  trade.  Tie  figures  that  his  regular  patrons 
will  order  a  certain  supply  of  meat.    He  also  knows  that  if 


INVESTMENTS  ANL  SPECULATION  123 

they  fail  to  do  so,  what  is  left  over  must  be  made  good  out 
of  his  daily  profits. 

AVlicn  the  farmer  tills  his  soil  and  puts  it  to  seed  in  the 
sprinj;-,  he  speculates,  does  he  not,  on  a  favorable  outcome 
of  his  harvest?  Not  only  does  he  speculate  but  long  before 
the  time  has  been  reached  to  garner  the  fruits  of  his  sea- 
son's toil,  he  has  already  pledged  part  of  the  harvest  for 
loans  at  his  bank,  dejDending  entirely  upon  his  crops  to  take 
them  up. 

Human  endeavor,  whichever  way  it  is  directed,  largel}^ 
speculates  upon  a  favorable  outcome.  The  manufacturer 
invests  considerable  money  in  raw  products  to  turn  into 
finished  articles,  and  in  labor,  counting  upon  a  steady  de- 
mand from  consumers  for  his  profits.  If  he  needs  money, 
he  borrows  from  the  bank,  expecting  to  repay  the  loans 
from  his  sales.  The  wholesale  merchant,  whether  he  deals 
in  dry  goods,  coal,  groceries,  jewelry  or  the  dozen  and  one 
staple  commodities,  does  the  same  and  assumes  the  same 
risk,  putting  his  judgment  against  the  future. 

In  going  into  these  minute  details,  I  merely  attempt  to 
show  what  misconception  exists  regarding  speculation. 
The  critics  take  the  shadow  for  the  substance  and  hold  the 
sul)stance  responsible  for  the  evil  effects  of  the  shadow. 

If  a  man  fails  in  speculation  and  is  ruined  in  conse- 
quence, he  is  pitied  and  speculation  pilloried  before  pul)lic 
opinion  as  a  crime. 

If  he  fails  in  business  as  a  result  of  misjudging  his  op- 
portunities, he  is  not  pitied,  but  condemned  as  an  inca- 
pable business  man,  although  underlying  ])oth  misfortunes 
there  must  have  been  the  same  cause,  a  gi'eed  to  bite  off 
more  than  could  be  cared  for,  or  greed  to  acquire  a  fortune 
quickly,  even  at  the  risk  of  rashness. 

There  are  any  number  of  people  who  buy  real  estate 
or  farm  lands  every  year,  knowing  full  well  they  have  not 
the  money  to  purchase  it  outright.  They  make  their  pur- 
chases subject  to  the  encumbrances  or  mortgages  already 


124  LOUIS  GUENTHER 

standing  against  the  property.  AVhat  money  they  pay  out 
is  for  the  equity  and  nothing  else.  They  are  confident  of 
their  ability  to  care  for  the  interest  on  the  mortgages.  They 
expect  their  equity  to  increase  in  value  sufficiently  to  en- 
able them  to  tuiu  over  their  property  to  some  other  buyer  at 
a  good  profit. 

Even  the  more  humble  wage  worker  does  this  when  he 
buys  his  home  on  the  installment  plan  from  a  builder,  who 
himself,  to  construct  the  house,  has  already  plastered  it 
with  a  mortgage  to  his  banlv,  and  the  interest  on  which 
mortgage  the  wage-earner  must  pay  in  addition  to  paying 
off  the  equity  in  easy  installments. 

In  each  instance,  the  buyer  is  buying  on  a  margin  ex- 
actly in  a  similar  manner  as  he  would  buy  on  margin  cer- 
tain stocks  or  certain  quantities  of  grain  or  cotton.  Some 
one  else  lends  him  the  money  on  the  unpaid  balance  on  which 
he  pays  interest.  Yet  some  people  hold  this  practice  to  be 
wrong,  to  be  gambling,  while  they  hold  the  purchase  of  real 
estate  on  part  payment  and  financing  the  remainder  by  a 
loan  as  a  legal  and  ethiciil  transaction.  If  the  one  be  wrong, 
the  other  is  also. 

Moreover,  there  are  as  many  failures  through  over-ex- 
tension in  real  estate  operations  as  in  stock  speculation.  As 
many  people  have  their  property  sold  through  foreclosure, 
because  of  their  inability  to  meet  their  interest,  as  there  are 
people  who  have  their  speculative  commitments  in  stocks 
closed  out  through  iua])ility  to  provide  more  margin. 

The  evil  in  speculation  is  not  in  speculation  itself.  Where 
it  arises  most  is  through  ignorance  of  conditions.  Un- 
scrupulous brokers  and  mercenary  ''tipsters"  are  to  a  large 
degree  responsible  for  the  odium  so  frequently  heaped  up- 
on speculation.  They  tempt  people  into  the  whirli-iool, 
where  the  most  acute  .iudgment  must  be  exercised.  These 
people  have  no  knowledge  of  the  principles  of  speculation, 
but  the  operator  drags  them  in  by  appealing  to  their  greed 
and  cupidity.    They  are  told  about  what  great  fortunes  are 


INVESTMENTS  AND  SPECULATION  125 

made  on  a  few  liiuidreds  or  thousands.  They  are  induced 
to  so  over-extend  themselves  that  the  movement  in  their 
specuh\tion  of  a  few  points  against  them  completely  wipes 
them  out.  The  most  festering  sores  on  speculation  have 
been  the  bucket-shops.  Their  gain  lies  in  the  losses  suffered 
by  their  patrons.  The  more  they  can  shake  out,  the  greater 
the  profits;  therefore,  it  was  at  all  times  to  their  inter- 
est to  tempt  their  customers  to  operate  on  slim  margins. 
Fortunately,  these  concerns,  which  were  no  more  than  gam- 
bling shops,  as  they  very  seldom  bought  securities  outright 
and  in  which  speculation  was  reduced  to  guessing  on  the 
day  to  day  fluctuations  and  not  infrequently  from  hour  to 
hour,  have  now  been  driven  out  of  business  by  most  of  the 
states.  Of  late  the  United  States  Government  has  also 
tfiken  a  hand  in  extinguishing  them,  as  it  can  do  since  their 
existence  depends  upon  transacting  most  of  their  business 
through  the  mails. 

However,  equally  mendacious  is  the  "tipster,"  the  ad- 
vertising tipster  who  brazenly  proclaims  in  large  t\^e  that 
he  is  in  a  position  to  tell  beforehand  certain  movements 
in  securities.  These  charlatans  succeed  in  garnering  a 
harvest  of  ignorant  and  greedy  victims  who,  with  a  child- 
like faith,  swallow  their  statements  in  absolute  confidence, 
and  plunge  blindly  into  buying  the  stocks  recommended  to 
them  as  going  to  jump  many  j^oints,  only  in  the  end  to  lose 
all  their  money.  It  is  paradoxical  that  some  peo])le  will  be- 
lieve such  stories  coming  from  strangers,  but  when  it  comes 
to  business  transactions  with  which  they  are  familiar,  they 
are  as  shrewd  in  their  bartering  as  the  chief  character  in 
**  David  Ha  rum." 

If  the  average  person  would  only  pause  to  think  that  if 
these  tipsters  were  so  certain  of  success  even  in  a  tithe  of 
their  supposed  information,  they  could  make  in  a  night  a 
fortune  large  enough  to  place  them  above  want  for  the  rest 
of  their  natural  lives  and  beyond  all  necessity  of  retailing 
their  information  for  the  twenty  or  ten  dollars  they  succeed 


126  LOUIS  GUENTHER 

in  cajoling  i'l-oin  trusting,  aiiibitiuus  persons  who  strive  to 
get  rich  hurriedly  on  inside  information,  most  of  which  is 
purely  guess  work. 

Yet  these  Cagliostros  of  the  linancial  centers  have  con- 
tributed largely  to  the  disrepute  speculation  occasionally 
falls  to  in  this  countrv,  due  to  the  laxitv  of  the  auth(trities, 
who,  it  seems,  might  find  some  way  tn  drive  them  out  nf 
business. 

There  are  also  the  so-called  financial  geniuses  wh<»  have 
devised  a  system  of  reducing  speculation  to  an  accurate 
science,  who  by  charts  or  other  devices,  claim  they  can  accu- 
rately gauge  the  fluctuation  in  prices  so  that  there  is  no 
risk  whatever.  Scheme  after  scheme  of  this  character  has 
been  launched,  each  one  finding  some  following,  at  times 
lai'ge,  at  other  tmies  but  a  beggar's  guard  of  embryonic 
speculators.  Some  have  been  put  forth  by  sincere  fools; 
others  by  outright  crooks  who  know  only  too  well  how  to  at- 
tune their  plans  to  the  credulity  of  the  public.  But  none 
ever  succeed.  One  by  one  they  go  to  pieces,  leaving  in  their 
wake  a  train  of  victims. 

Speculation  cannot  be  harnessed  to  comply  with  any  man- 
made  laws.  Keen  insight  into  conditions,  a  thorough  famil- 
iarity with  the  earnings  of  certain  properties,  or  the  C(Ui(li- 
tion  of  the  crops,  if  this  is  the  commodity  in  which  a  spec- 
ulation is  concerned,  and  a  clear  knowledge  of  the  tenden- 
cies and  trend,  are  abilities  making  for  successful  specula- 
tion, and  they  are  individualistic,  not  mechanical.  A  person 
might  as  well  try  to  bi-eak  the  T>ank  of  ^lonte  Carlo  on  a 
system  (»r  any  other  game  of  chance  as  to  attempt  to  reduce 
speculation  to  a  science. 

It  cannot  be  done,  for  there  are  too  manv  elements  of 
uncertaintv.  Life  itself  consists  of  uncertainties.  AVithal, 
intelligent  speculation  is  absolutely  necessary  tt>  the  mate- 
rial progress  of  a  nation.  Risks  must  be  taken  to  make  head- 
way in  business  as  well  as  in  the  purchase  of  securities  or 
connnodities. 


INVESTMENTS  AND  SPECULATION  127 

The  country  as  a  whole  lias  spent  all  the  pvoeeeds  of  a 
harvest  in  anticipation  of  it,  long  before  it  gets  to  the  mar- 
kets, and  immediately  starts  upon  contracting  liabilities,  ex- 
pecting to  meet  them  out  of  the  next  harvest.  When  it  over- 
does this  and  is  disappointed,  the  country  pays  the  penalty 
by  a  business  depression.  We  discount  the  future,  and  in 
doing  so,  speculation  plays  the  largest  part.  It  is  impos- 
sible to  denv  this  fact. 

None  of  our  railroads,  nor  any  of  our  largest  corpora- 
tions could  have  ever  attained  their  prominence  or  magni- 
tude were  there  not  an  army  of  optimists  confident  of  their 
growth,  willing  to  take  chances  in  the  enhancement  of  the 
value  of  their  securities  when  they  were  low.  Where  would 
these  properties  have  raised  their  necessary  capital  without 
these  speculators? 

And  when  we  consider  that,  as  a  result,  many  millions  of 
persons  find  emplo^^nent,  we  can  see  one  of  the  great  bene- 
fits arising  from  speculation. 

Speculation  in  itself  is  vitally  necessary.  Its  abuses 
are  what  we  should  strive  to  control.  IMuch  of  that  can  be 
done  away  with  by  the  spread  of  intelligence  regarding  its 
operations. 


XXIII.    THE  MYSTERY  OF  A  B^U^AXCE  SHEET. 

Corporations  whose  securities  are  largely  in  the  hands 
of  tlie  public  ought  to  furnish  their  shareholders  a  state- 
ment of  their  financial  condition  at  least  once  a  year.  Ac- 
conipanying  this  annual  report  there  should  be  a  statement 
of  the  earnings  and  disbursements  during  the  year. 

Shareholders  have  a  right  to  know  what  the  managers  of 
their  corporations  are  doing  in  a  business  way  and  how 
their  proi>erties  are  being  managed  by  those  chosen  among 
them  to  officer  and  direct  them. 

Not  all  corporations,  however,  do  this.  Various  reas- 
ons are  given  in  explanation.  Some  claim  that  in  making 
their  affairs  known  they  lay  their  trade  secrets  before  com- 
petitors. Other  corporations  assert  there  is  nothing  to  be 
gained  by  revealing  their  profits  as  long  as  the  stockhold- 
ers are  receiving  dividends  regularly,  but  that  such  disclos- 
ures are  likely  to  subject  them  to  annoying  inquisitions 
from  tax  gatherers.  In  answer  to  the  first  statement  it  is  to 
be  said  that  financial  statements  can  be  prepared  so  as  not 
to  reveal  trade  secrets.  In  answer  to  the  second  claim,  no 
corporation  ought  to  shirk  paying  its  legitimate  propor- 
tion of  taxes. 

Secrec)^  regarding  financial  operations  has  a  bad  effect 
U])on  confidence  as  it  rightly  should  have.  Unless  a  corpor- 
ation is  a  strong  one  and  has  had  an  enviable  financial  rep- 
utation for  years,  the  refusal  to  make  its  affairs  known  to 
the  shareholders  has  the  inevitable  tendencv  to  create  the 
suspicion  that  not  all  is  as  well  with  it  as  the  corporation 
would  wish  to  have  the  shareholders  believe. 

As  a  matter  of  i»ii1)lic  policy,  the  National  Government 
has  made  it  cominilsory  for  the  railroads  to  make  monthly 
reports  of  earnings  and  operating  expenses  to  the  Inter- 

128 


INVESTMENTS  AND  SPECULATION  129 

state  Commerce  Coimnission  and  ^vllile  these  reports  still 
lack  clarity  in  makinpj  them  intelligible  to  most  sharehold- 
ers, they  at  least  afford  the  opportunity  to  make  intelligible 
comparisons.  Some  of  the  states  make  it  also  compulsory 
for  the  public  service  corporations  to  file  their  earnings  for 
public  inspection.  But  compulsion  is  far  from  satisfactory 
in  supplying  shareholders  with  information,  as  is  the  case 
when  corporations  recognize  their  rights  and  of  their  own 
accord  willingly  publish  statements. 

The  majority  of  our  coi^orations  have  come  to  rec- 
ognize their  obligations  to  their  stockholders  in  this  respect 
and  at  regular  intervals  issue  earning  statements  and  an 
annual  report  at  least  once  a  year.  The  great  United  States 
Steel  Corporation  even  goes  so  far  in  recognizing  the  rights 
of  its  more  than  200,000  stockholders  as  to  publish  at  least 
once  a  month  the  tonnage  in  steel  orders  booked. 

As  far  as  the  earnings  and  operating  expenses  are  con- 
cerned, there  can  be  little  about  them  to  confuse  the  intell- 
igent stockholder.  There  can  be  no  jockeying  with  these 
figures  for  any  length  of  time  without  the  fact  becoming 
apparent  very  soon. 

A\niere  the  lay  mind,  unfamiliar  with  the  intricacies  of 
bookkeeping  is  likely  to  be  puzzled,  is  in  the  corporation's 
balance  sheet  which  is  supposed  to  give  to  the  stockholders 
an  accounting  of  its  assets  and  liabilities.  It  is  here  that  a 
good  deal  of  educational  work  is  necessary.  The  appraised 
value  of  a  coi'poration 's  assets  must  be  largely  accepted  up- 
on faith.  A  large  number  of  corporations,  however,  in  an 
effort  to  convince  shareholders  regarding  the  authenticity 
of  the  appraisement  of  their  financial  condition  go  so  far 
as  to  secure  an  independent  audit  by  certified  accountants, 
a  method  which  has  been  verv  well  received  and  can  usuallv 
be  relied  upon. 

But  an  independent  audit  is  not  always  such  as  it  should 
be.  T  have  often  seen  certified  statements  of  this  character 
which  would  no  more  convince  me  that  the  balance  sheet 

B.VII— 9 


130  LOUIS  GUENTHER 

sii])niittcd  was  conservative  than  had  the  corporations  sub- 
mitted the  figures  unvouched  for.  Some  of  these  account- 
ants sini})]}-  certify  that  tliev  liave  checked  the  different 
items  on  a  corjKn-ation's  book  and  have  found  tlieni  as  rep- 
resented. This,  bluntly  stated,  merely  means  that  they  have 
accepted  them  as  being  correct  without  carefully  going  into 
the  matter  to  determine  whether  there  has  been  any  infla- 
tion in  ap})raising  the  assets  with  the  purpose  in  view  of  es- 
tablishing a  strong  financial  showing. 

To  what  an  extent  a  financial  statement  can  be  made  to 
falsify,  I  publish  herewith  a  statement  issued  a  few  years 
ago  by  a  wireless  telegraph  concern  which  had  been  engaged 
in  the  fraudulent  exploitation  of  its  shares  until  the  Gov- 
ernment stepped  in  and  init  a  stop  to  the  swindle.  This  is 
the  statement : 

ASSETS. 

Patents  and  patent  rights $  5,005,100.00 

Stock  in   treasury   (par) 5.310,41(».(K) 

Stocks  and  bonds  in  other  companies — book  value 14.128,610.00 

Cash  in  treasury  and  treasury  agents 109,400.70 

Office   furniture   and   fi.xtures 3.975.38 

Factory   material   on    hand 9,285.55 

Factories    and    equipments    2.), 99(5. 94 

liilis  and  accounts  receivable 17(),49S.08 

Land  stations  and  real  estate 215.442.50 

Boat   stations    287.500.00 

$25,272,219.15 
LIABILITIES. 

Capital    stock   (authorized    issue) $20,000,000.00 

Bills  and  accounts  payable  (current  monthly) 15,556.37 

Surplus    5,256.662.78 

$25,272,219.15 

Here  is  a  statement  which  superficially  present.s  a  very 
strong  financial  position.  Taken  on  its  face,  it  shows  a  book 
value  for  the  shares  which  are  of  a  par  value  of  $\0,  of  over 
$12.50,  not  including  its  speculative  possibilities.  On  this 
flimsy  financial  statement  the  financial  sharks  who  were 
operating  this  scheme  succeeded  in  selling  considerable 
stock  for  as  high  as  $?>0  a  share,  or  three  times  its  par  value. 
The  par  value  is  the  value  of  the  shares  as  printed  on  the 


INVESTMENTS  AND  SPECULATION  131 

face  of  the  certificate  of  stock.  The  very  fact  that  so  many 
people  accepted  this  financial  statement  as  representing  the 
actual  financial  condition  of  the  corporation,  is  sufficient 
proof  in  itself  that  very  few  investors  look  behind  figures, 
although  a  great  many  things  may  be  concealed  there. 

To  an  analytical  mind  the  first  glance  at  this  statement 
would  arouse  at  once  a  justifiable  suspicion  that  there  was  a 
great  deal  of  inflation  contained  in  the  security.  Investiga- 
tion would  have  revealed  the  fact  that  an  abnormal  valua- 
tion was  placed  on  "patents  and  patent  rights."  Going 
further,  the  item  of  stocks  and  bonds  in  other  companies 
was  apparent  on  the  face  of  it  to  be  gi-ossly  exaggerated. 
If  nothing  else  would  suggest  this  conclusion,  the  state- 
ment "book  value"  would  have  done  so,  since  a  well-man- 
aged corporation  whose  affairs  are  conservatively  con- 
ducted does  not  value  securities  owned  in  other  corpora- 
tions at  their  book  value,  but  market  or  liquidatable  value. 

In  this  instance  it  happened  that  these  stocks  and  bonds 
were  all  in  defunct  concerns  taken  over  by  this  concern  and 
which  had  little,  if  any,  value.  As  for  the  value  of  the  "land 
stations  and  real  estate"  and  "boat  stations,"  thev  were 
also  arbitrarily  appraised. 

The  result  is  that  instead  of  there  being  a  surplus  of 
$5,256,662.78  as  indicated,  there  was  a  deficit  after  the  in- 
flation in  "patents"  of  $5,005,100.00,  in  "stock  in  the  treas- 
ury" of  $5,310,410.00,  and  in  "stocks  and  bonds  in  other 
companies"  of  $14,128,610.00  had  been  deducted  from  the 
assets.  Together  these  three  items  aggregated  $24,444,120.00. 
Deducting  them  from  the  assets  left  only  $840,099,  if  what 
can  be  considered  actual  physical  value  of  the  remaining 
items  are  accepted  as  represented.  Placed  side  by  side  with 
the  liabilities,  there  is  then  a  deficit  of  $19,184,457,  instead 
of  a  surplus  of  $5,256,662.78,  a  hopeless  case  of  insolvency 
as  the  shareholders'  stock  is  practically  worthless. 

The  illustration  serves  to  enlighten  the  readers  of  this 
book  with  respect  to  the  possibilities  tkat  lie  in  juggling 


132  LOUIS  GUENTHER 

figures  in  making  up  a  financial  statement  where  tlie  work 
is  in  charge  of  unscrupulous  people. 

Such  items  in  a  financial  statement  as  "good-will,'* 
"patent  rights,"  "trade  marks,"  etc.,  should  never  be  in- 
cluded among  the  assets.  In  the  first  place,  they  are  not 
tangible  assets.  There  is  no  wav  bv  which  a  market  value 
may  be  placed  upon  them.  I  do  not  assert  that  they  have 
no  worth  at  all,  for  in  some  instances  they  are  quite  valua- 
ble, but  what  that  value  is  can  onlv  be  determined  when  an 
offer  is  made  for  them. 

The  mere  assumption  on  the  part  of  the  directors  that 
the)^  would  not  sell  these  assets  except  at  the  figures  at 
which  they  have  valued  them  in  their  statement,  by  no  means 
makes  them  w^ortli  that  much.    Thev  mav  never  receive  such 

ft  ft- 

an  offer. 

Such  items  should  be  carried  as  concealed  assets.  To 
use  them  for  the  purpose  of  striking  a  balance  in  a  corpor- 
ation's financial  statement  must  arouse  at  once  the  belief 
in  the  intelligent  investor's  miud  that  their  function  is  to 
perform  the  work  of  inflation,  to  make  a  better  showing 
than  really  exists.  What  is  more,  under  the  cover  of  such 
assets,  insolvency  can  be  concealed,  as  the  value  of  these 
assets  may  be  correspondingly  increased  as  the  liabilities 
grow. 

Creditors  of  a  corporation,  however,  are  very  soldc^m 
deceived  by  these  assets.  They  do  not  pay  their  bills.  When 
the  creditors  cannot  get  their  money  promptly,  it  is  not  long 
before  the  corporation  is  thrown  into  bankru])tcy.  When 
this  occurs  the  unsuspecting  shareholders  who  have  l)eeu 
going  along  unsuspiciously  in  the  belief  that  their  corpora- 
tion was  in  a  strong  financial  shape,  are  rudely  awakened 
to  the  existence  of  a  contrarv  state  of  affairs. 

ft 

A  financial  wit  once  described  the  surplus  item  in  a  fi- 
nancial statement  as  a  corporation's  ash  heap  on  which 
were  thrown  all  the  undesi  \able  items  which  it  was  advis- 
able to  keep  from  too  prying  eyes.    The  descri23tion,  how- 


INVESTMENTS  AND  SPECULATION  133 

ever,  is  far-fotclied.  With  reputable  corporations  the  sur- 
plus stands  for  exactly  what  it  means,  the  excess  in  assets 
over  the  liabilities.  It  is  the  reverse  with  corporations  of 
the  other  type. 

For  a  financial  schemer  concerned  only  in  roping  in 
credulous  investors,  juggling  figures  so  as  to  get  at  a  healthy 
surplus  is  the  least  difficult  part  of  his  work.  In  the  finan- 
cial statements  which  dishonest  promotors  concoct  for  their 
ventures,  all  of  them  mani;  ulate  the  figures.  Their  main 
concern  is  in  getting  people  to  believe  in  their  figures. 

I  am  reminded  of  a  case  which  occurred  some  years  ago 
where  a  Get-Rich-Quick  Wallingford  succeeded  in  deceiv- 
ing even  some  very  shrewd  bankers  by  including  for  a  large 
amount  among  his  assets  the  item  ''Government  and  other 
bonds,"  thereby  establishing  for  his  venture  a  robust  sur- 
plus upon  which  he  was  able  to  secure  quite  a  number  of 
loans.  This  item  included  one  government  bond  of  the  de- 
nomination of  $1,000.  All  the  other  bonds  were  not  worth 
the  paper  on  which  they  were  printed. 

That  a  surplus  at  times  is  meaningless  was  demonstra- 
ted some  3'ears  ago  by  the  failure  of  the  Baltimore  &  Ohio, 
which  had  been  allowed  by  the  younger  generation  of  the 
founders  of  the  propert}^  to  run  down.  Up  to  the  day  of  the 
failure  the  annual  statement  carried  a  surplus  in  excess  of 
$3(),000,000.  But  there  was  no  suiplus.  The  alleged  surplus 
proved  to  be  an  item  against  which  the  railroad  chargc^l  sup- 
posed equities  and  expenditures  whieh  were  regarded  as 
investments.  The  management  was  deceiving  itself  quite  as 
much  as  it  did  the  stockholders. 

AVliat  T  should  regard  an  illuminating  financial  state- 
ment conservatively  prepared  is  the  following,  recently  sub- 
mitted to  its  shareholders  by  one  of  the  smaller  electrical 
manufacturing  companies: 

ASSETS. 
PLANT. 

Lands.  Suildinprs.  tools,  patterns,  equipment,  etc.,  (less  Reserve 

for   Depreciation   deducted  $547,903.99) $1,348,366.70 


134  LOUIS  GUENTHER 

PATENTS. 

Patents  at  cost  dcss  depreciation  deducted.  $104,832.37) 25,000.00 

STOCKS   AND   BONDS    24.021.42 

MERCHANDISE. 

At  factory — at  shop  cost $f>r,.'i.230.24 

Consignment — at  shop  cost    fi4.s{)0.20 


CURRENT  ASSETS. 

Accounts    receivable     5;76fi.407.80 

Less  reserve  for  doubtful  accounts lo.ooo.oo 

$756,407.80 

Bills  receivable    31.539.14 

Cash     136.909.41 


730,030.44 


924.916.35 

Total  merchandise  and  current  assets 1.654.946.79 

Total $3,052,334.91 

CAPITAL  AND  LLABILITIES. 

CAPTTAT,  STOCK    $1,958,375.00 

CURRENT  LIABILITIES. 

Accounts    pavable     $  22,398.57 

Notes  payable 657.500.00 


SURPLUS. 

Balance  January  1,   1910    284,719.75 

Net    prolit    ironi    operation    for    the 

year    1910    $278,144.11 

Less  interest  paid    $  44,300.02 

Less   dividends   paid    104.502.50       148,802.52       129,341.59 


679.898.57 


Balance  /or  December  31,  1910   414,061.34 

Total      $3,052,334.91 

This  financial  statcmont  is  as  coniplcto  in  essential  in- 
foTination  for  the  sliaroholdors  as  the  other  and  previous 
statement  is  lacking  in  it.  Tn  this  statement  the  cost  of  pat- 
ents is  placed  at  a  nominal  sum,  so  small  in  fact  as  to  show 
that  their  valne  ahout  represents  the  actual  outlay  to  secure 
the  patents.  The  other  item,  ''stocks  and  honds/'  is  also 
so  small  as  to  be  insi<]:nificant.  What  makes  the  statement 
stronc:  and  carries  the  im]iression  that  the  corporation  has 
tnkcii  its  stockholders  wholly  into  its  confidence,  is  the  care 
taken  to  show  ever^'thinc:  as  it  actually  is. 

Tn  KuLcland  the  shareholders  take  a  .c:reater  interest  in 
the  affairs  of  their  corporations.  They  do  not  do  as  many 
American  shareholders  do — leave  it  mostly  to  the  officers 
and  directors  to  represent  them  at  their  annual  meetings 
through  proxies.  They  come  to  the  meetings  in  ninnhers 
prepared  to  heckle  the  chairman  thoroughly  regarding  dif- 


INVESTMENTS  AND  SPECULATION  135 

f  eroDt  items  in  the  annual  statement  about  wliicli  they  have 
just  cause  for  criticism. 

If  more  heckling  were  done  by  the  stockholders  in  this 
country  at  their  annual  meetings,  more  care  would  be  ex- 
ercised by  the  directors  of  our  corporations  to  have  their 
annual  statements  comprehensive.  There  would  be  less 
mysticism  in  connection  with  the  different  items.  We  have 
the  habit  of  leaving  such  matters,  as  vital  as  they  are,  to 
others.  Each  item  in  a  financial  statement  should  be  care- 
fully scrutinized  and  when  there  is  any  doubt  in  the  mind  a 
courteous  request  to  the  secretary  for  more  detailed  facts 
should  bring  the  desired  information.  Any  effort  at  con- 
cealment is  a  reason  to  arouse  your  suspicion  unless  a  satis- 
factory explanation  is  offered. 

In  late  years  in  the  capitalization  of  industrial  corpor- 
ations, the  tendency  has  been  to  depart  from  our  more  con- 
servative methods  of  basing  the  capital  on  physical  assets, 
with  a  reasonable  margin  for  future  growth.  Instead,  the 
earning  possibilities  of  a  corporation  are  capitalized.  If  a 
corporation  has  indicated  it  can  earn  $100,000  a  year,  the 
capital  is  placed  around  $1,000,000,  and  so  on,  irrespective 
of  its  actual  assets.  Fundamentally  this  idea  is  wi'ong.  It 
is  at  the  bottom  of  our  evil  of  stock-watering.  It  robs  secu- 
rities of  book  value  and  places  them  upon  the  intangible 
basis  of  earning  power. 

That  this  is  true  a  simple  illustration  will  prove  by  re- 
ducing stock  to  a  partnership  arrangement.  One  would 
hardly  pay  for  a  half-interest  in  a  partnership  $100,000  be- 
cause of  the  fact  that  the  business  was  making  $20,000  a  year 
which  divided  between  two  partners  would  reduce  the  rev- 
enue for  each  to  $10,000,  or  10  per  cent.  There  are  too  many 
contingencies  likely  to  arise  that  would  reduce  the  revenue 
to  a  much  smaller  sum.  Yet  it  is  on  this  very  idea  that  some 
of  our  captains  of  industry  base  their  capital  for  their  ven- 
tures. 


XXIV.     TTTK  FrXPTTOX  OF  EXCTTAXOES. 

^loro  than  a  hniKlred  years  ago  a  small  p*oup  of  men 
sat  in  a  building  located  in  what  is  now  the  lioart  of  New 
York's  financial  district  and  organized  an  Exchange.  Their 
object  was  the  common  one  of  meeting  daily  to  deal  in  the 
few  securities  for  which  at  the  time  there  was  a  market. 

New  York,  then,  although  even  thus  early  the  financial 
capital  of  the  struggling  young  country,  was  still  a  small 
city,  not  much  larger  in  ])i>pulation  than  that  <>f  All)any  to- 
day. But  it  already  had  a  number  of  thi'iving  l)anks  and 
small  industries  in  which  its  wealthy  citizens  were  tinan- 
cially  interested  and  it  was  the  idea  to  provide  a  convenient 
place  where  these  stocks  could  be  bought  and  sold  that  was 
responsible  for  the  establishment  of  the  Exchange. 

The  founders  of  the  Exchange,  which  still  exists  as  the 
New  York  Stock  Exchange,  desired  their  organization  to 
be  an  exclusive  one.  Therefore  iiistead  of  publicly  incor- 
porating their  association  under  the  laws  of  the  state,  they 
formed  a  club  whose  object  w^as  to  bring  the  members  to- 
gether for  commercial,  instead  of  social,  intercourse. 

As  a  club  the  members  could  of  course  arbitrarily  control 
its  policy.  They  could  decide  without  any  outside  interfer- 
ence who  might  join  their  organization.  This  rule  still  pre- 
vails. AVhile  the  members  are  free  to  sell  their  membership, 
the  Stock  Exchange,  or  club,  as  it  really  is,  retains  com])lete 
jurisdiction  over  the  membershii).  The  Exchange  can  ac- 
cept or  reject  the  applicatinn  for  niemb(>rshi]i  of  any  ]iur- 
chaser  of  a  seat. 

A  seat  on  the  Stock  Exchange  is  what  a  membership  is 
called.  It  is  a  figurative  expression,  as  there  are  no  chairs 
on  the  floor  of  the  l-'xchange.  There  is  too  nmch  activity  to 
permit  trading  in  securities  in  such  leisurely  fashion.    The 

136 


INVESTMENTS  AND  SPECULATION  137 

term,  however,  has  been  handed  down  from  the  early  days 
of  the  Stock  Exchange  when  the  business  transacted  was  of 
limited  volume.  There  were  then  chairs  in  the  little  room  in 
which  the  members  gathered,  in  which  they  could  lounge 
while  the  secretary  read  the  offers  and  bids  the  members 
of  the  organization  made  and  upon  which  they  governed 
their  dealings  between  themselves.  Such  calls  were  made 
but  once  a  day.  From  that  practice  the  term  **a  seat  on  the 
Stock  Exchange"  originated. 

Yet,  the  Stock  Exchange,  or  for  that  matter  any  of  our 
other  exchanges,  are  not  original  with  us,  or  are  their  func- 
tions vastl}^  different  from  those  of  the  exchanges  in  other 
countries.  Primarily  they  sprung  into  existence  in  response 
to  the  urgent  demand  for  a  central  clearing-house  for  secu- 
rities or  commodities  in  which  the  public  is  vitally  inter- 
ested. Our  New  York  Stock  Exchange  is  closely  patterned 
after  the  London  Stock  Exchange.  Our  grain  and  cotton 
exchanges  have  for  their  models  the  leading  exchanges  on 
the  other  side  dealing  in  similar  commodities. 

It  is  equally  true  in  this  country,  as  it  is  abroad,  that  the 
leading  exchanges  are  a  law  unto  themselves.  Their  func- 
tions are  of  such  vastly  important  character  that  the  slight- 
est disturbance  to  their  subtle  influence  is  at  once  felt  even 
to  the  most  extreme  ends  of  our  commercial  sphere  of  oper- 
ation. 

Politically  the  center  of  a  nation's  power  is  at  its  cap- 
ital. Commercially,  though,  it  is  at  the  moneyed  center  of 
the  comitiy  and  it  is  here  also  that  the  most  powerful  and 
influential  exchanges  will  be  found.  In  the  United  States, 
New  York  City  is  the  moneyed  capital  of  the  countiy;  in 
Canada,  ^lontreal :  in  England,  London ;  in  Gennany,  Ber- 
lin; in  France,  Paris;  in  Australia,  Vienna;  and  in  Holland, 
Amsterdam. 

We  little  realize,  and  much  less  appreciate,  how  abso- 
lutely essential  to  our  material  progress  are  our  exchanges. 
While  it  may  be  true  that  we  possibly  could  get  along  with- 


138  LOUIS  GUENTHER 

out  them,  it  is  iicvorthck'ss  a  truism  that  witliout  thi'Ui  our 
commercial  advancement  would  proceed  at  a  snail's  pace. 
Simmered  down  to  its  hist  analysis,  the  principal  function  of 
exchaneres  is  to  provide  a  central  market.  They  serve  as 
a  place  for  quick  transactions.  They  make  it  possible  to  bar- 
ter in  securities  or  commodities  in  seconds,  whereas  without 
their  existence  it  could  not  be  done  in  a  day's  time,  some- 
times longer,  for  the  sellers  would  be  forced  to  go  hunting 
for  buyers  and  even  when  they  finally  got  together  it  would 
still  be  a  question  between  them  whether  the  prices  agreed 
upon  were  fair. 

Time  and  distance  is  a  great  factor.  The  foundei-s  <»f 
our  Stock  Exchange  desired  to  save  the  one  and  cut  down 
the  other  when  they  organized  the  Exchange  over  a  century 
ago,  and  in  doing  this  they  were  but  following  a  natural  im- 
pulse. They  were  merely  com])lying  with  the  dictates  of 
economic  laws  which  make  themselves  felt  in  everv  nation, 
whether  its  native  tongue  be  English,  Cxerman,  Italian  or 
French. 

While  primarily  the  object  of  an  exchange  is  to  provide 
convenience  in  trading,  it  exercises  other  functions  of  no 
less  importance.  Besides  bringing  traders  together,  ex- 
changes also  exert  a  strong  tendency  towards  an  equilil)rium 
ill  prices.  That  is  to  say,  by  gathering  about  them  a  large 
community  interested  in  certain  securities  for  which  they 
are  the  central  market,  there  quite  naturally  follows  free 
and  unrestrained  bidding  and  offering,  through  which  is 
established,  in  accordance  with  prevailing  conditions,  a 
greater  stability  to  values.  Their  price-making  function,  as 
determined  by  the  dealings  transacted  between  their  mem- 
bers, furnished  the  banking  interests  of  the  country  a  fair 
index  as  to  the  extent  loans  may  safely  be  made  upon  secu- 
rities. Herein  alone  is  a  function  of  an  exchange  of  inesti- 
mable value. 

Another  function  of  an  exchange  is  that  of  acting  as 
barometers  of  trade.    They  anticipate  the  ebb  and  flow  of 


INVESTMENTS  AND  SPECULATION  139 

prosperity  long  before  the  changes  make  themselves  felt 
upon  the  surface  of  business.  In  times  of  panic  they  act 
as  a  bulwark  of  strength  even  in  face  of  the  ruthless  slaugh- 
ter in  prices,  for  we  could  imagine  what  might  possibly  oc- 
cur in  the  form  of  demoralization  if  there  were  no  place 
where  securities  could  be  readilv  sold  when  demands  for 
ready  capital  press  a  community. 

I  am  now  discussing  generally  the  functions  of  exchang- 
es and  not  dealing  with  the  character  of  their  operations.  I 
am  attempting  to  show  how  they  fulfill  one  of  the  principal 
necessities  to  our  economic  well-being— to  prove  how  utterly 
foolish  it  would  be  to  make  any  attempt  to  legislate  them 
out  of  existence.  Controlled  thev  should  be,  but  onlv  in  so 
far  as  to  comix'l  them  to  properly  exercise  their  functions. 
Beyond  that  they  ought  not  to  be  disturbed.  Any  legislative 
restriction  aiming  at  their  extinction  is  but  a  blow  at  the 
foundations  of  a  nation's  progress  and  prosperity. 

A  seat  on  the  New  York  Stock  Exchange  has  sold  close 
to  $100,000.  It  has  been  some  years  since  the  value  of  a  seat 
has  been  as  low  as  $50,000.  We  have  here,  figuratively 
speaking,  some  idea  of  its  importance.  It  shows  that  a  mem- 
bership is  an  exceedingly  valuable  privilege  and,  as  the 
country  grows  older  and  wealthier,  it  is  likely  to  increase 
in  value. 

The  popular  imi)ression  is  that  what  makes  the  seats  on 
the  Exchange  so  valuable  is  the  limited  membership.  This 
is  more  or  less  a  fallacy.  There  are  other  exchanges  in  Xew 
York  City,  a  smaller  stock  exchange  and  a  produce  ex- 
change ;  the  membership  of  each  of  these  exchanges  is  also 
limited.  Yet  the  privilege  or  entree  to  their  floors  can  be 
had  for  a  nominal  sum— a  bagatelle  compared  to  the  price 
of  a  Stock  Exchange  seat.  The  vast  amount  of  business 
transacted  every  year  on  the  Stock  Exchange  alone  is  re- 
sponsible for  the  high  price  the  seats  bring. 

To  belong  to  the  London  Stock  Exchange  costs  more 
than  a  seat  on  our  Exchange  for  the  London  Exchange  does 


140  LOUIS  GUENTHER 

even  a  much  larger  business.  In  France,  however,  where 
the  Government  controls  the  Bourse  and  limits  the  member- 
ship to  a  select  few,  the  privilege  is  exceedingly  valuable,  a 
recent  estimate  making  a  membership  worth  as  high  as  one 
million  dollars. 

Still  it  is  not  to  be  wttndered  at  that  men  are  to  be  found 
willing  to  i^ay  such  large  sums  of  money  to  exercise  these 
privileges.  Often  in  single  active  sessions  on  our  Stock 
Exchange  as  many  as  2,000,000  shares  of  stock  are  dealt  in 
and  there  have  been  sessions  when  the  totals  have  reached 
as  high  as  3,000,000  shares  and  this  does  not  include  at  all, 
the  transactions  in  bonds  which  reach  large  proportions. 

What  this  means  in  dollars  and  cents  mav  best  be  illus- 
trated  by  a  short  example  in  figures.  The  unit  of  trading 
on  the  Stock  Exchange  is  $100,  so  that,  if  a  stock  has  a  i>ar 
value  of  only  $50  each,  100  shares  reported  in  the  transac- 
tions really  stands  for  200  shares  of  stock.  To  make  plainer 
this  unit  of  trading,  I  call  attention  to  such  stocks  as  Read- 
ing, Lehigh  Valley,  Pennsylvania  and  AVestinghouse  Elec- 
tric. Although  traded  in  on  the  basis  of  a  $100  par  value, 
these  stocks  are  issued  only  at  $50  par  value  and  are 
called  on  the  Stock  Exchange'  half-shares.  If  a  pei-son 
were  to  purchase  100  shares  of  any  one  of  these  stocks  on 
the  Stock  Exchange  unit,  he  would  be  really  buying  only  50 
shares. 

Now,  were  we  to  strike  an  average  ]^rice  of  $50  as  the 
price  realized  for  all  stocks  sold  (»n  the  Stock  Exchange  in  a 
single  active  session,  the  total  business  would  represent  a 
turn-over  in  wealth  of  $150,000,000  for  3,0()0.0()0  shares; 
$100,000,000  foi'  2,000,000  shares  and  $50,000,000  for  1,000,- 
000  shares.  The  average  I  have  taken  is  a  reasonable  one 
for  there  are  many  securities  listed  on  the  Xew  York  Stock 
Exchange  conunanding  prices  considerably  above  their  ]"»ar 
value  of  $100  and  a  small  numbei*  under  $;50  a  share,  while 
somewhere  between  that  and  $100  is  the  range  in  prices  of 
a  lai'ge  mim1)er  of  securities;  for  instance,  Pennsvlvania, 


INVESTMENTS  AND  SPECULATION  141 

New  Haven,  Consolidated  Gas,  Readini;-,  St.  Paul,  Lacka- 
wanna, Cliicai^o  &  Northwestern,  Southern  Pacific,  Union 
Pacific  and  Jersev  Central,  to  mention  only  a  few  of  our 
well-known  securities,  a  price  considei"a])ly  in  excess  of 
their  par  value. 

By  the  rules  of  the  Exchange  a  nieml)er  is  not  permitted 
to  charge  his  client  more  than  J  per  cent  of  the  par  value 
of  the  stock  as  his  conunission,  nor  can  a  member  charge 
less  except  when  executing  an  order  for  another  member ; 
then  he  is  allowed  to  make  a  charge  of  $2  for  each  100  shares. 
This  conmiission  to  the  customer  comes  to  $12.50  on  each 
100  shares  of  stock  and  $1.25  on  each  $1,000  denomination  in 
bonds. 

I  am  going  into  these  small  details  to  emphasize  and 
drive  home  the  realization  of  what  a  vast  and  gigantic  busi- 
ness machine  the  Stock  Exchange  is.  If  its  members  handled 
orders  for  3,000,000  shares  for  their  clients,  in  one  session 
their  conunissions  would  reach  $365,000.  If  these  orders 
were  between  members,  the  commissions  would  be  only  $60,- 
000;  on  2,000,000  shares  for  clients,  they  would  receive  as 
conmiission  $250,000 ;  between  members,  only  $40,000 ;  and 
on  1,000,000  shares  for  clients,  commissions  of  $125,000; 
between  members,  but  $20,000. 

With  such  possi])iHties  for  making  money,  it  can  be  read- 
ily understood  why  men  will  eagerly  pay  as  high  as  $100,- 
000  for  the  privilege  of  belonging  to  the  Stock  Exchange. 
It  is  safe  to  say  that  in  an  active  year  of  speculation  the 
public  pays  as  nuu'h  as  $100,000,000  in  commissions  to  the 
members  of  the  Stock  Exchange  on  stocks  alone  and  almost 
as  much  fnv  ])onds  l)ought  on  its  floor  and  not  over  the 
counter.  In  this  estimate  there  is  not  included  the  broker- 
age the  pu])Iic  pays  to  members  of  the  grain  and  cotton  ex- 
changes as  well  as  to  the  minor  exchanges  of  the  counti'v,  of 
which  there  are  quite  a  nuni])er  scattered  through  our  diffei*- 
ent  large  cities. 

But  it  is  not  in  the  commissions  the  members  of  the  Ex- 


142  LOUIS  GUENTHER 

c'liaiigc  receive  tliat  the  most  imposin^^  statistics  arc  to  be 
found.  Tt  is  in  the  ac:tn'cp:ate  wealth  the}^  are  instrumental 
in  swinp:in^^  back  and  forth,  wliicli  causes  astnnislnncnt  and 
reflects  tlie  i^reat  power  of  the  Exchange. 

Here  again,  by  striking  an  average  for  the  300  or  more 
days  in  a  year  tlie  Stuck  Exchange  does  ])usiness  of  only 
500,000  shares  as  the  daily  volume  of  transactions,  we  arrive 
at  the  enormous  total  of  $15,000,000,000  in  securities  chang- 
ing hands,  not  considering  bonds  at  all  in  this  estimate. 
Some  years  tlie  figures  are  even  larger. 

It  is  true  that  a  great  many  of  the  active  securities 
change  ownership  many  times  during  an  active  session.  It 
is  a  fact  also  that  there  is  considerable  duplication  and  that 
a  great  bulk  of  securities  are  bought  and  sold  by  speculators 
with  no  intention  to  hold  for  more  than  a  short  time  and  to 
be  disposed  of  as  soon  as  there  is  a  ])rotit,  or  when  the  hold- 
ers are  compelled  to  let  go  on  account  of  exhausted  margins, 
but  the  multiplicity  of  transactions  can  in  no  way  overshad- 
ow the  real  function  of  the  Exchange,  which  is,  as  already 
stated,  that  of  a  central  market.  In  like  measure  is  the 
statement  true  of  the  cotton  and  grain  exchanges,  where,  in- 
stead of  shares,  commodities  are  bought  and  sold. 

Viewing  our  exchanges,  therefore,  in  their  proper  light, 
we  nmst  appreciate  their  im])ortance.  AVere  it  not  for  their 
ability  to  make  capital  mol)ile,  there  would  exist  a  great  dis- 
parity in  ])rices.  It  stands  to  reason  that  the  greater  the 
number  of  buyers  and  s<'llers  gathered  together,  the  lietter 
and  firmer  tone  there  will  be  to  values  because  of  the  con- 
centrated market. 

It  is  not  because  Reading  <»v  I^nitinl  States  Steel  shares 
are  superior  securities  in  point  of  intrinsic  worth  to  a  good 
many  other  securities  that  makes  it  ])ossib]e  to  Wud  a  market 
f(»r  them  at  a  moment's  notice.  It  is  due  ti>  the  fact  that 
thev  have  a  concentrated  and  active  market  which  the  Stock 
Exchange  alone  has  made  possible.  Peo})le  will  buy  these 
stocks  and  buy  others  equally  active  and  listed  on  the  Ex- 


INVESTMENTS  AND  SPECULATION  143 

change  as  they  realize  they  can  sell  them  quickly  and  at  frac- 
tional changes  in  the  price,  and  banks  will  lend  money  on 
them  with  equal  readiness  for  the  same  reasons.  They  will 
do  this  in  preference  to  purchasing  unlisted  securities  as  a 
market,  for  this  latter  class  of  securities  may  not  be  avail- 
able at  the  time  one  is  most  wanted.  Thus  we  see  where 
the  exchanges  perform  two  useful  purposes,  that  of  being  a 
price-making  arbiter,  a  power  unto  itself  of  fixing  values, 
and  that  of  being  a  quick  and  facile  market,  rapidly  regulat- 
ing itself  to  existing  conditions. 

In  a  larger  way  and  almost  unconsciously,  the  exchanges 
accomplish  what  a  country  at  all  times  is  in  need  of,  and 
that  is  a  source  through  which  to  raise  capital  for  the  devel- 
opment of  its  resources.  By  the  facilities  for  trading  that 
they  are  in  a  position  to  offer,  they  quicken  the  speculative 
instincts  of  the  people. 

It  would  have  been  impossible  to  have  raised  the  cap- 
ital for  the  billion  and  half  United  States  Steel  Corporation 
without  the  Stock  Exchange  and  its  facilities.  It  opened  the 
sluice  ways  to  the  nation's  wealth.  It  made  at  once  possible 
the  marketing  of  its  shares. 

The  fact  is  undeniable  that  capital  can  be  more  quickly 
raised  for  general  industry  and  for  the  expansion  of  our 
railroads  when  the  public  is  aware  that  there  will  be 
a  market  for  the  new  securities.  What  the  public  wants 
is  a  market  in  which  it  can  sell  as  well  as  buy  and 
this  the  Exchange  provides.  Cai)ital  gravitates  to  the 
moneyed  centers.  This  is  a  natural  law  as  nnich  as  is  the 
law  of  gi-avity  which  makes  the  apple  fall  to  the  earth.  It 
will  flow  to  the  center  where  it  can  beget  the  largest  return 
for  its  use.  AVhat  is  more  natural  then,  tlian  that  it  should 
congest  itself  about  the  portals  of  the  principal  exchanges 
and  its  masters  avail  themselves  of  their  facilities.  For 
capital  has  its  masters.  If  they  are  not  in  the  form  of  the 
*' captains  of  industry"  as  we  are  wont  to  call  our  pi'eat  un- 
derwriting bankers,  they  are  unconsciously  in  the  shape  of 


144  LOUIS  GUENTHER 

acciuinilated  deposits  in  the  Ijaiiks.  These  deposits,  to  em- 
ploy tlieinselves  protital)ly  aud  still  be  instantly  available 
for  other  pnrposes,  find  the  avenue  whereby  this  object  can 
be  accomplished  through  loans  on  securities  listed  on  the 
exchange  or  in  commodities,  as  in  grain,  cotton  or  metals. 

That  is  the  underlving  reason  fully  explaining  why  it  is 
that  oui'  exchanges,  like  a  great  big  drag  net,  can  attract  to 
its  doors  from  every  direction  and  from  what  seems  the 
most  inaccessible  places,  the  liquid  c^ipital  of  the  nation. 

Our  exchanges  bring  in  the  capital  from  the  four  points 
of  the  compass,  some  of  it  for  investment,  other  portions  for 
speculation  and  again  other  portions,  the  minor  part,  from 
foolish  people  who,  sad  to  say,  deliberately  attempt  to  ac- 
quire wealth  overnight  by  simple  gambling  on  the  tiuctua- 
tions.  To  the  shrewd  and  fortunate  ones,  the  Exchange  re- 
turns their  money  with  substantial  profits.  From  the  mis- 
guided and  unfortunate  ones,  it  exacts  its  toll.  Such  will 
always  prove  the  case.  There  is  no  law  to  i)revent  it.  It  is 
but  one  of  the  phases  of  the  operation  of  the  exchanges  over 
which  no  control  can  be  exercised,  for  in  their  function  of  es- 
tablishing i^rices  there  is  no  way  to  jDrevent  gambling  in  the 
fluctuations  in  the  quotations. 

It  has  been  pointed  out  by  reformers  that  this  could  be 
done  by  prohil)iting  margin-trading,  by  forcing  the  outright 
I)urchase  of  securities  and  commodities.  But  this  is  a  foolish 
conclusion.  Suppose  this  were  attempted.  What  then,  would 
liai>i)en?  Instead  of  the  brokers  arranging  the  loan  the  i)ur- 
chaser  of  a  security  would  attend  to  it.  He  could  not  be 
prevented  from  borrowing  a  certain  sum  of  money  from  a 
])ank  on  securities  if  there  was  in  existence  a  law  conq)ell- 
ing  him  to  purchase  securities  outright. 

If  margin-trading  is  illegal,  either  from  a  mural  or  legal 
standpoint,  then  it  is  equally  illegal  to  purchase  real  estate 
subject  to  an  incumbrance.  Fundamentally  the  practice  is 
not  WTong.  Where  it  is  at  fault  is  its  abuse  by  people  who, 
iK'causc  of  their  financial  circumstances,  ought  not  to  buy 


INVESTMENTS  AND  SPECULATION  145 

on  margin  any  more  than  a  person  with  a  few  thonsand 
dollars  should  attempt  to  buy  a  piece  of  property  he  could 
not  carry,  but  does  carry  it  because  he  expects  to  sell  it  at 
a  profit  before  he  is  called  upon  for  more  money.  This  is 
not  speculation  ;  it  is  gambling. 

The  real  purpose  of  an  exchange  is  to  make  capital  mo- 
l)ile  by  gathering  it  together.  It  provides  capital  with  the 
opportunities  to  make  money.  It  opens  channels  for 
investments.  It  is  a  price  maker,  a  barometer  of  trade,  in 
fact  it  is  a  gTcat  big  heart  through  which  come  the  power 
and  blood  needed  to  feed  the  arteries  of  conmaerce.  With- 
out them  the  commercial  progress  of  a  country  could  be  put 
back  many  years. 


B.VII— 10 


XXV.  .METHODS  OF  TRADING  IX  STOCKS. 

All  transactions  on  the  New  York  Stock  Exchange  are 
for  cash.  There  is  no  niargin-tradinu'.  Members  must  set- 
tle all  differences  between  them  for  the  transactions  of  the 
previous  24  hours  before  or  at  "  llannnond's  Time"  or  2:15 
]).  m.  At  that  time  all  securities  nuist  ])e  delivered.  All  stocks 
bought  on  the  ])revious  day  nmst  then  be  accepted,  and  all 
stocks  sold,  delivered.  Otherwise  a  purchase  or  a  sale  is 
not  good. 

If  a  member  cannot  settle,  he  is  declared  insolvent,  and 
the  secretary  announces  his  embarrassment  from  the  ros- 
trum of  the  Exchange.  His  accounts  are  then  closed.  The 
Exchange  assumes  no  responsibility  for  the  liabilities  of  a 
bankrupt  member.  They  fall  entirely  upon  the  members 
who  are  unfortunate  enough  to  be  the  creditors  of  the  insol- 
vent member. 

AVhatever  value  a  member's  seat  possesses,  however,  ac- 
cording to  the  rules  of  the  Exchange,  reverts  to  his  cred- 
itors. While  failures  on  the  Exchange  are  unavoidable,  the 
percentage  is  no  larger  than  in  other  lines  of  business. 

The  Exchange  operates  a  clearing-house,  nuich  on  the 
same  ])lan  as  the  clearing-house  for  an  association  of  banks. 
This  clearing-house  makes  it  convenient  for  the  nu^mbers 
to  settle  their  obligations  to  one  another  with  the  least  de- 
lay. 

It  wotdd  prove  a  slow  and  cumbersome  process  were  it 
necessary  every  time  a  member  bought  stock  for  a  client  to 
draw  a  cheek  to  the  menil)er  from  whom  it  was  ])urchased  or 
if  stock  was  sold,  to  deliver  the  certificate  to  the  Iniyer  and 
in  turn  receive  a  clu^'k.  Through  the  cleai*ing-h(^use  such 
details  are  sim]dified.  Each  member  has  an  account  against 
which  is  credited  stocks  bought  and  debitcMl  with  stocks 
sold,  and  settlement  made  accordingly. 

146 


INVESTMENTS  AND  SPECULATION  147 

But  tlu'  uiechauism  of  the  clearing-house  is  not  of  such 
importance  as  are  the  methods  of  trading  employed  on  the 
Stock  Exchange.  These  methods  may  be  broadly  divided 
into  two  forms ;  after  this  they  mav  be  subdivided. 

First  there  is  the  purchase  of  securities  outright.  This 
is  the  simplest  form.  All  that  is  necessary  in  this  case  is 
to  give  a  member  of  an  Exchange  an  order  to  buy  a  certain 
amount  of  stock  at  a  given  price,  or  at  the  market  price.  The 
broker  has  the  order  executed  and  he  delivers  the  security, 
charging  the  usual  commission  of  J  per  cent.  His  transac- 
tion is  completed  when  the  stock  is  delivered. 

Market  orders  are  much  more  easily  executed,  as  thev 
G:ive  the  broker  full  liberty  to  buy  at  whatever  the  market 
price  may  be  at  the  time  tlie  order  is  given,  but  such  orders 
are  not  always  to  the  advantage  of  the  customer.  In  an  ac- 
tive session  a  stock  may  jump  a  number  of  points  in  price 
before  the  broker  can  fill  his  customer's  order.  Sometimes 
it  occurs  in  a  declining  market,  that  a  market  order  is  filled 
at  a  lower  price  than  a  customer  expected.  Still,  it  is  not  a 
practice  among  shrewd  traders  to  place  market  orders,  es- 
pecially in  inactive  securities  or  those  stocks  in  which  there 
is  very  little  trading  when  it  can  be  avoided. 

In  buying  bonds  on  the  Stock  Exchange,  or  for  that  mat- 
ter, over  the  counter  of  a  bond  house,  it  is  understood  that 
accrued  interest  is  added  to  the  price,  although  this  is  not 
mentioned.  For  example,  a  bond  bought  in  May,  whose  in- 
terest is  due  in  July,  carries  three  months'  interest  which  is 
represented  in  the  coupon  attached  to  the  bond.  This  inter- 
est for  the  period  between  January  and  ]\[ay  properly  be- 
longs to  the  holder  (tf  tlic  bond  from  whom  it  is  purchased, 
and  must  be  paid  to  him  in  addition  to  the  purchase  price. 

When  a  stock  is  sold,  tlic  same  proceedings  are  followed. 
The  member  of  the  Exchange  disposes  of  the  security  at  a 
fixed  or  market  price,  and  when  the  sale  is  confimied  and 
the  stock  delivered,  the  broker  pays  his  client,  less  his  fixed 
brokerage. 


148  LOUIS  GUENTHER 

The  more  complex  form  of  operation  uu  the  Stock  Ex- 
change is  that  of  trading  on  margins.  This,  as  already  ex- 
plained in  the  previous  section,  is  a  method  of  doing  business 
by  which  brokers  finance  the  purchase  or  sale  of  securities 
in  part  for  their  clients.  Say,  for  example,  a  customer  wish- 
es to  jDurchase  one  hundred  shares  of  Union  Pacific  stock. 
Suppose  at  the  time  the  stock  may  be  selling  at  $150  a  share. 
The  buyer  does  not  wish  to  purchase  the  stock  outright, 
which  would  cost  him  $15,000,  plus  $12.50,  the  broker's  com- 
mission. The  customer  makes  a  deposit,  say,  of  $1,500,  or 
10  per  cent  of  the  purchase  price.  Members,  unless  they  are 
thoroughly  satisfied  with  the  financial  responsibility  of  a 
client,  will  not  accept  a  deposit  of  less  than  10  per  cent  of 
the  market  price  of  securities,  and  will  often  demand  more 
if  the  securities  desired  have  an  inactive  market.  Some 
inactive  stock  brokers  will  not  buy  for  customers  except  by 
outright  purchase,  since  those  stocks  have  no  wide  market 
and  the  brokers  do  not  wish  to  be  ciiught  with  them  on  their 
hands  in  case  their  customers  cannot  take  them  up. 

But  since  the  majority  of  Stock  Exchange  members  will 
buy  active  stocks  for  clients  on  a  10  per  cent  margin,  the  il- 
lustration will  serve  my  purpose  in  explaining  in  detail  how 
such  orders  are  handled.  After  the  customer  deposits  his 
margin  and  gives  his  order,  the  broker,  upon  executing  it, 
arranges  with  his  bank  for  a  loan  for  the  greater  part  of 
the  purchase  price.  It  is  the  usual  custom  for  banks  to  lend 
on  active  securities  up  to  80  per  cent  of  their  market  value, 
always  with  the  proviso  that  the  borrower  must  deposit  ad- 
ditional collateral  if  the  market  price  declines  to  where  the 
bank's  equity  in  the  loan  is  impaired. 

With  a  loan  from  his  bank  for  approximately  80  per 
cent  of  the  market  price  of  a  stock,  with  his  customer  having 
deposited  10  per  cent  margin,  there  remains  for  the  broker 
therefore,  only  10  per  cent,  which  he  must  provide  out  of 
his  own  capital.  On  some  securities  he  must  put  up  more, 
while  others  he  must  finance  wholly  out  of  his  own  cajntal. 


INVESTMENTS  AND  SPECULATION  149 

as  tlic  banks  will  make  no  loans  on  thorn.  Here  we  have  a 
succinct  ilhistration  of  what  is  called  margin-trading  in  its 
simplest  form.  Now,  if  Union  Pacific  stock  advances  to 
$160  a  share,  the  customer  then  has  a  profit  of  $10  a  share, 
or  $1,000  on  his  one  hundred  shares,  less,  of  course,  commis- 
sion and  the  interest  he  owes  on  the  balance  due  on  the 
stock. 

Although  not  stated,  it  is  usually  understood,  unless 
agi'eed  otherwise,  that  all  loans  on  stocks  are  call  loans,  made 
on  the  prevailing  rate  of  interest  on  such  loans  throughout 
the  period  the  bank  carries  the  stock. 

Call  loans  differ  from  time  loans  in  that  the  lender  is  em- 
powered to  demand  at  his  discretion  and  without  previous 
notice  from  the  borrower,  the  pajTnent  of  his  loan.  AVith 
a  time  loan,  or  a  loan  extending  over  a  specified  j^eriod,  the 
lender  nuist  wait  for  payment  until  the  loan  matures. 

Large  Stock  Exchange  operators  whose  business  is  worth 
having  because  of  the  large  profits  in  commissions,  in  their 
trading,  have  an  advantage  over  small  traders  as  they  can 
privately  arrange  through  their  brokers  for  time  loans  at 
reasonable  rates  of  interest  as  a  safeguard  against  any  un- 
usual flurry  in  interest  rates,  as  is  likely  to  occur  in  an  ex- 
cited period  of  speculative  activity. 

When  there  is  an  accunuilation  of  capital  in  the  vaults  of 
the  banks,  interest  rates  on  call  loans  are  unusually  low. 
There  have  been  times  when  such  loans  could  be  made  by 
large  borrowers  at  interest  rates  as  low  as  one  per  cent.  But 
this  condition  may  quickly  change.  It  is  often  reversed 
around  the  crop-moving  period,  when  interior  banks 
draw  on  their  central  bank  reserves  to  provide  for  the  bor- 
rowing demand  at  home.  Then  it  is  when  loanable  capital 
becomes  scarce,  and  conmiands  a  premium.  Call  loans  will 
then  sometimes  jump  to  100  per  cent  or  more. 

During  the  so-called  Gates  boom  in  stocks,  call  loans 
touched  as  high  as  200  per  cent.  For  one  half  hour,  in  Oc- 
tober, during  the  climax  of  the  1907  panic,  call  loans  were 


150  LOUIS  GUENTHER 

not  in  1)0  liad  at  any  price,  althou^li  fi-cnziod  brokers,  whose 
tense  and  Maiidied  faces  saw  disaster  starinj;:  them  in  the 
face,  were  willing:  to  make  any  terms  to  get  money  to  save 
them  from  the  ruin  that  seemed  inevitable.  A  powerful 
bankinir  syndicate  was  hurriedly  formed  to  lend  $25,000,000 
on  the  Stock  Exchanu^e.  The  monev  was  obtained,  and  it 
saved  the  day. 

In  adverting  to  the  varial)ility  of  interest  rates  for  call 
money  it  is  my  puri)ose  to  direct  attention  to  the  inliucnce 
these  changes  exert  on  speculation.  In  fact  observing  spec- 
ulators watch  call  money  interest  rates  almost  as  closely  as 
they  study  ])revailing  tendencies  and  conditions  in  trade,  to 
determine  their  etfect  upon  security  prices. 

Take  up  once  more  the  case  of  the  imaginary  buyer  of 
one  hundred  shares  of  Union  Pacific  stock.  If  he  has  a 
profit,  he  can  close  his  account  and  draw  from  his  broker 
his  margin,  plus  the  additional  amount  represented  by  the 
advance  in  his  stock,  or  if  he  desires  to  extend  his  operation, 
the  increase  in  his  credit  balance  allows  him  then  to  do  so. 

On  the  other  hand,  if  Union  Pacific,  costing  $150  a  share, 
declines  in  price,  say  in  the  neighborhood  of  $140,  where  the 
Ijroker  fears  an  impairment  of  his  customer's  margin,  to 
the  point  of  exliaustion,  he  will  call  upon  him  for  an  addi- 
tional margin  and  unless  this  deposit  is  immediately  forth- 
coming it  is  within  the  broker's  discretion  to  close  the  ac- 
count, sell  the  stock  and  settle  with  his  customer.  He  does 
not  have  to  wait  until  the  stock  touches  $140  a  share  before 
doing  this.  For  his  own  protection,  he  is  allowed  this  priv- 
ilege and  it  is  so  stated  in  the  agreement  the  cust(^mer  signs 
when  i)lacing  an  order. 

Tile  operation  slightly  varies  when  a  buyer  turns  a  seller 
of  stock.  A  sjx'culatoi-,  l)elieving  that  Union  Pacific  around 
$150  a  share  is  selling  too  high,  will  sell  the  stock  through  the 
broker  at  this  i)rice.  Sui»])ose  he  agrees  to  sell  one  hundred 
shares.  He  deposits  with  his  broker  a  margin  <»f  10  jx-r 
cent  or  $1,500.    As  he  is  selling,  he  does  not  have  to  borrow 


'INVESTMENTS  AND  SPECULATION  151 

any  money.  He  simply  agrees  to  deliver  one  hundred  shares 
for  $150  a  share  when  he  is  ready  to  do  it.  Should  Union 
Pacific  decline  to  $140  a  share,  the  seller  could  buy  one  hun- 
dred shares  in  the  open  market  at  this  price  and  by  so  do- 
ing would  be  making  a  delivery  of  his  stock  on  his  selling 
contract.  As  he  has  sold  it  for  $150  and  bought  it  for  $140 
he  has  made  a  profit  of  $10  a  share  or  $1,000  on  his  sale  of 
one  hundred  shares.  The  greater  the  decline  in  the  price, 
the  larger  his  profit.  But  should  Union  Pacific  advance  in- 
stead of  decline  in  price,  every  point  above  $150,  the  price 
he  agreed  to  deliver  it  for,  means  a  loss  of  one  dollar  on 
each  share  as  each  j^oint  represents  the  equivalent  of  one 
dollar.  If  the  stock  advances  to  $160  a  share,  his  margin 
would  be  exhausted  unless  he  had  made  an  additional  de- 
posit to  further  protect  himself. 

Now,  we  here  have  an  illustration  of  what  is  called  mar- 
gin-trading, and  upon  which  so  much  abuse  is  heaped  by 
reformers  who  regard  it  as  a  malevolent  influence  upon  the 
country.  Plow  inconsistent  is  the  assertion  can  be  demon- 
strated. A  man  of  wealth  or  even  one  in  comfortal)le  cir- 
cumstances may  feel  perfectly  justified  in  the  purchase  of 
a  block  of  stock  on  margin.  He  may  not  wish  to  tie  up  the 
entire  purchase  price  by  paying  for  it  outright,  although  if 
necessary  he  could  advance  the  whole  amount  and  take 
the  securities  out  of  the  market  and  put  them  away  in  his 
safe.  Has  he  not  the  right  to  make  such  a  purchase?  To 
deny  him  the  privilege  and  permit  a  tradesman  to  use  his 
credit  for  the  purchase  of  goods  would  be  unfair  and  unjust. 

Suppose  he  were  cut  off  from  the  ])rivilege  of  trading  in 
this  manner  through  a  mem])er  of  the  Stock  Exchange,  he 
could  not  be  prevented  from  carrying  out  a  similar  opera- 
tion though  more  cumbersome,  in  another  form.  If  he  has 
credit  at  his  bank  he  could  l^orrow  the  money  to  buy  the 
stock  outright,  and  when  it  has  been  delivered  to  him  take 
it  over  to  the  bank  and  pledge  it  as  collateral  for  his  loan. 
When  the  stock  shows  him  a  profit  he  could  then  sell  it,  pay 


152  LOUIS  GUENTHER 

the  loan  and  the  matter  would  be  closed.  Assuredly  banks 
could  not  be  prevented  from  makinjj^  loans  upon  ccood  collat- 
eral. That  is  their  business.  It  is  one  of  the  principal  main- 
stays for  the  profitable  eni])l(»yment  of  their  deposits. 

Between  the  two  methods  there  is  no  difference,  save  the 
one  operation  is  more  mobile  than  the  other.  There  is  noth- 
ing fundamentally  wrong  in  margin-trading.  It  is  not  an 
evil.  The  evil  lies  in  the  abuse  of  the  system  by  persons 
whose  circumstances  and  lack  of  knowledge  does  not  justify 
their  trading  in  this  manner.  Such  people  attempt  to  do  the 
impossible  on  a  ** shoe-string."  To  some  extent  it  is  the 
fault  of  the  brokers,  but  it  is  fair  to  say  on  behalf  of  the 
majority  of  the  members  of  the  Stock  Exchange,  that  they 
do  not  encourage  speculation  among  those  whose  financial 
resources  are  limited,  or  by  the  ignorant,  while  speculative 
accounts  of  women  are  regarded  as  particularly  offensive 
by  the  Stock  Exchange  itself. 

It  is  well-nigh  impossible  to  wholly  exclude  these  peo- 
ple from  speculation.  Somehow  or  other  they  will  gamble 
in  some  fonn  or  other,  and  find  a  means  to  satisfy  their 
cravings.  The  Government  put  a  stop  to  the  Louisiana  lot- 
tery, yet  the  people  kept  on  gambling.  Racing  was  stopped 
by  different  states,  but  the  restrictive  measures  failed  to 
check  betting  on  the  races.  So  is  it  true  with  card-]ilayiug. 
Illegal  it  is,  but  gambling  rooms  continue  to  thrive. 

There  are  other  abuses  of  the  machinery  of  the  Stock  Ex- 
change, as  T  shall  try  to  point  out  later,  but  tliey  can  in  a 
large  measure  be  controlled  without  enforcing  the  suicidal 
policy  of  striking  a  blow  at  the  foundations  of  the  function 
it  performs  for  the  country— of  providing  it  with  a  great 
central  market  f(U'  the  greatest  mass  of  its  securities. 

Selling  stock  on  margin  is  regarded  a  greater  evil  than 
even  buying  on  margin.  No  one  should  sell  Avhat  he  does 
not  own,  is  generally  the  claim  made  to  justify  this  conten- 
tion, llow  inconsistent  this  is  can  also  be  easily  demonstra- 
ted.   All  of  our  millers  sell  flour  loug  before  they  loiow  what 


INVESTMENTS  AND  SPECULATION  153 

tlio  liarvcst  is  to  be.  Tlicv  bank  on  the  correctness  of  their 
judgment  as  to  the  size  of  the  crop,  expecting  to  buy  their 
wheat  cheap  enough  from  the  farmers  to  make  a  gO(xl  profit 
out  of  the  difference.  The  contractor  agrees  to  buikl  a  house 
for  a  certain  price,  relying  on  his  judgment  of  the  market 
for  labor  and  material  to  net  him  a  good  profit,  although  in 
the  meanwhile  prices  could  have  gone  up  above  his  estimate. 
Even  the  laborer  sells  his  labor  ** short,''  and  theoretically, 
when  he  finds  he  cannot  make  his  living  expenses  squai'e 
with  his  wages,  he  has  lost  money. 

AVherein  then  is  the  difference  between  the  examples  just 
cited  and  selling  securities  ?  If  a  person  believes  a  security 
is  commanding,  in  his  opinion,  too  high  a  price,  he  is  morally 
justified  in  selling  it,  even  if  he  does  not  own  it,  as  much  as 
the  miller  has  the  right  to  sell  flour  he  expects  to  grind  from 
next  season's  wheat  harvest,  or  the  contractor  estimates  on 
constructing  a  building  from  material  h(^  has  not  yet  bought 
or  labor  he  has  not  yet  hired. 

Kor  can  the  lay  mind  fully  appreciate,  without  being 
thoroughly  familiar  with  the  economic  value  of  specuhition, 
what  a  great  bulwark  the  selling  of  securities  which  are  not 
owned  at  the  time  they  are  sold  is  in  times  of  stress,  and 
when  everyone  seems  to  be  anxious  to  unload  securities.  In 
such  times  these  ** short"  sales  are  the  only  mainstay  of  the 
market.  What  has  been  sold  and  is  not  owned,  must  be 
boudit  back  sooner  or  later  bv  the  sellers  so  that  thev  mav 
turn  their  profits  into  cash.  Were  it  not  f(n'  these  "short" 
sales  buttressing  the  market,  ]")rices  would  not  only  decline 
perpendicularly,  but  they  would  fall  all  to  pieces  and  the 
widespread  fear  it  would  arouse  would  have  a  most  disas- 
trous result. 


xxAX  :mt:tttods  of  tt^adtxc  tx  sTorxs. 

(Continued.) 

On  the  stock  c'Xclian,ii:os,  the  dollar  mark  is  the  sicrn  of 
values  and  it  is  divisible  into  fractions  of  ciL;hths.  Kach 
ii  stands  for  12^  cents  of  the  dollar.  To  more  clearly  illus- 
trate the  pro})osition,  take,  as  an  exami)le,  such  a  popular 
stock  as  United  States  Steel  and  suppose  it  is  reported  in  the 
openinp:  quotations  as  selling  at  the  even  mark  of  j^TO  a 
share.  The  next  quotation  is  at  70j^:  this  means  the  stock 
has  been  bought  for  $70.12 J.  If  the  quotation  is  70],  it  rep- 
resents $70.25 ;  at  $70|^,  it  is  $70.37 J ;  at  $70i,  it  is  $70.50 ;  at 
$705,  it  is  $70.67 J  ;  at  $70^,  it  is  $70.75 ;  at  $70g,  it  is  $70.87 ; 
and  then  $71.  Conversely,  every  eighth  fraction  less  in  the 
reported  price  of  a  stock  represents  a  loss  of  exactly  12i 
cents  in  its  market  value  and  correspondingly  a  greater  loss 
■when  the  fractional  declines  are  larger. 

On  the  board  of  trade  or  the  produce  exchange  the  trans- 
actions in  grain  are  on  the  basis  of  bushels.  On  the  cotton 
exchange  cotton  is  bought  and  sold  in  bales.  On  the  grain 
exchange  tlic  dollar  is  the  mark  of  vahu^  and  it  is  also  di- 
visible into  fractions  as  small  as  1/16.  In  cotton  it  is  divided 
into  points. 

On  the  stock  exchanges  are  to  be  found  shares  and  bonds 
only.  On  the  grain  exchanges  agricultural  ]u-o(luets  are  the 
stajdes  in  ^vhi('h  the  public  liarters,  including  live  stock 
and  the  different  farm  ])roduets.  The  po])ular  staples  form- 
ing the  bulk  of  the  business  are  wheat,  corn,  oatvS,  rye  and 
barley.  From  a  li-adiiig  standpoint  the  lesser  stajdes  are 
live  stock,  undei*  whieh  head  are  cattle,  hogs,  lard  and  tal- 
low. Tiive  stock  is  sold  by  the  pound;  lard  and  tal- 
low by  the  tier.  On  the  cotton  exchange  all  the  dealings  are 
confined  to  cotton  and  its  principal  constituent,  cotton  seed 

154 


INVESTMENTS  AND  SPECULATION  155 

oil.  In  Xc'w  Yoik  City  there  is  an  important  coffee  ex- 
elianiie  and  a  metal  exchange,  bnt  neither  one  has  nuieh  of 
a  ]>nhlic  following-.  As  important  as  are  onr  dairy  })roducts, 
sucli  as  milk,  eggs  and  Initter,  in  point  of  aggregate  money 
value,  very  little  trading  is  done  in  them  on  the  exchanges. 
Whatever  speculation  there  is  in  them  is  carried  on  directly 
among  the  dealers  who,  under  favorable  circumstances, 
sometimes  attempt  a  coalition  in  their  interests  to  maintain 
higher  prices  and  tow^ards  that  end  the  storage  houses  prove 
an  important  ally,  as  they  enable  the  dealers  to  store  their 
purchases  until  they  can  market  them  at  profitable  prices. 

The  followers  of  the  different  exchanges  are  divided  into 
two  camps.  We  know  them  as  "bulls"  and  "bears."  The 
bulls  on  the  stock  exchanges  are  the  optimists,  are  the  men 
who  are  prepared  to  back  their  judgment  of  the  betterment 
of  trade  and  its  cousequent  reflection  in  a  better  price  for 
securities.  "With  the  bears  it  is  different.  They  see  the 
darker  side  of  business  and  expect  to  benefit  by  a  decline  in 
values  w^hich  may  be  brought  about  by  slackening  in  trade 
and  from  commercial  disasters  which  they  try  to  anticipate 
through  sales  of  securities  before  the  occurrence  of  the 
troul)le. 

On  the  constructive  side  of  values  are  ranged  the  ])ulls; 
on  the  destructive  side,  the  bears.  Although,  in  ])ubli('  o]-)in- 
ion,  the  bear's  position  is  an  unenvia])le  one,  his  is  a  neces- 
sary role  in  the  scientific  game  of  speculation.  As  ali'eady 
pointed  out,  the  bears  in  a  critical  period  act  as  about  the 
onlv  mainstav  against  a  wholesale  destruction  of  values. 

Still,  it  is  more  or  less  a  stock  market  truism  that  there 
are  few  chronic  bears  who,  in  the  long  course  of  events, 
have  kept  the  large  fortunes  they  were  popularly  supiiosed 
to  have  made,  notwithstanding  that  their  o]iportunities  for 
quick  and  substantial  profits,  when  their  position  is  the  cor- 
rect one,  are  much  greater. 

Our  greatest  stock  market  bears,  those  who  have  made 
stock  market  history  died  comparatively  poor  men.    Occa- 


156  LOUIS  GUENTHER 

sionally  tlioro  passes  over  the  stock  iiiarkft  horizon  a  motoor 
ill  the  shajx' of  a  successful  aii(lspectaciilar])ear"svli(»lia])p('7is 
in  pluiiiic  on  a  decline  in  security  prices  at  a  psycliol<>i::icaI 
iiininent  and  is  carried  by  tlic  avalanche  in  the  slauixhter  of 
values  from  coni])arative  o])scurity  to  a  position  of  threat 
wealth.  Yet,  usually  liis  good  fortune  is  only  temporary. 
Somehow  or  other  these  striking  lignres  seem  not  to  realize 
that  stock  values  can  no  more  continuously  decline  tliaii  thev 
can  constantly  and  without  interruption  keep  going  up. 
Thev  overstav  their  market  and  within  a  short  time  all  their 
wealth  slips  away  as  easily  as  it  came  to  them. 

A  recent  illustration  of  this,  and  wliich  is  still  remem- 
])ered,  is  that  of  J.  Brandt  Walker,  a  daring  Chicago  specu- 
lator, who  burst  into  fame  as  a  big  stock  market  bear  on  the 
eve  of  the  great  panic  of  1907.  The  newspapers  all  over  the 
country  printed  columns  about  the  many  milli(»ns  he  was 
credited  with  making,  '^riiere  can  be  no  question  about  his 
temporary  success;  no  doulit  his  profits  ran  into  millions, 
but  it  was  less  than  a  year  later  that  he  lost  all  his  winnings 
and,  as  a  i^rominent  stock  market  figure  he  became  only  a 
memorv. 

ft' 

The  chronic  bear  sooner  or  later  invites  disaster  upon 
himself.  So  also  does  the  chronic  bull.  I'lie  successful  trad- 
er is  that  person  who  can  adapt  his  opinions  to  the  long 
trend  in  the  course  of  values,  whether  it  be  downwai'd  or 
n])ward.  That  there  takes  place  periodically  an  adjustment 
in  business  cannot  be  refuted,  but  it  does  not  occur  at  reg- 
uhir  ])eriods,  for  if  such  were  the  case  much  of  the  uncer- 
tainty cctnneeted  with  s]ieculation  and  upon  which  it  thi-iv(^s 
would  be  elimiiKited.  Adjustments  often  c(^me  quite  sud- 
denlv  and  nnexpectedlv.  There  will  come  a  cheek  to  a 
boom.  It  usually  occurs  when  we  ha\('  exhausted,  in  the 
ra]Md  haste  for  expansion,  all  the  availabh*  cajntal  at  our 
command.  In  the  same  oi-der  a  cheek  to  a  decline  will  oeeur 
when  all  the  force<l  liquidation  has  been  com])lete(l.  Be- 
tween the   two  extremes  there  takes  i)lace  a  period  of  stag- 


INVESTMENTS  AND  SPECULATION  157 

nation,  a  sort  of  pause  in  our  activities,  a  pause  to  afford  an 
opportunity  to  form  new  conclusions. 

Yet,  broadly  speaking,  every  one  who  deals  in  securities 
is  at  one  time  or  another  a  bull  or  a  bear.  AVhen  a  person 
sells  a  stock  it  is  the  sign  that  he  has  concluded  the  rise  in 
the  stock's  value  has  reached  its  apex  and  he  is  willing  to 
let  someone  also  take  the  chance  of  a  further  appreciation. 
He  may  sell  for  other  reasons.  Nevertheless,  whatever  the 
cause,  the  seller  is  constructively  a  bear.  On  the  other  hand, 
the  buver  is  a  bull.  If  he  is  buving  a  stock  he  has  sold  to 
someone  previously  to  make  his  delivery,  it  is  the  sign  that 
he  has  decided  in  liis  own  interest  that  the  decline  in  value 
has  run  its  course.  But  in  a  growing  country  the  predomi- 
nance of  opinion  is  towards  the  bullish  side  of  the  market. 
It  is  a  natural  position. 

J.  Pierpont  jMorgan  gave  it  as  his  opinion  some  years  ago 
that  anyone  who  is  not  a  bull  in  this  country  would  eventu- 
ally go  broke.  His  saying  has  become  a  stock  market  adage 
and  not  without  good  reason.  Our  financial  history  so  far 
has  clearly  shown  that  the  country  has  emerged  from  every 
panic  and  depression  stronger  than  ever  and  capable  of 
greater  progress. 

In  the  eighties,  when  nearly  two-thirds  of  our  railroad 
mileage  was  in  charge  of  the  courts,  men  who  had  faith  in 
the  country's  future,  men  like  Morgan,  Hill,  Kennedy,  Van- 
derbilt  and  others,  were  laying  the  foundations  for  their 
present  huge  fortunes,  whereas  other  men  who  could  not 
see  the  sunlight  behind  the  heavy  clouds  of  pessin^ism,  one  by 
one  went  broke. 

Then,  too,  it  is  only  a  natural  trait  of  human  nature  to  be 
a  bull.  Uiiderlying  the  greatest  progress  is  the  spirit  of  op- 
timism. It  naturally  corners  to  most  all  of  us  to  see  the 
})rightest  side  of  ])usiiu'ss.  In  fact,  our  wishes  are  fathers 
to  this  hope.  Our  ]U"osperity  individually  and  collectively 
has  progress  as  its  foundation.  ^lorgan  knew  this  and  that 
is  why  he  gave  utterance  to  this  now  famous  axiom. 


158  LOUIS  GUENTHER 

The  very  fact  that  nearly  nine  out  of  ton  people  are 
naturally  bulls  in  their  inclination  is  what  bucket-shop  op- 
erators banked  on  in  the  successful  conduct  of  their  out- 
lawed business  before  the  authorities  decided  up(^n  a  con- 
certed plan  to  put  a  stop  to  them.  Bucket-shops  are  in- 
stitutions which  never  buy  anythinix,  l)ut  sini])]y  Lrainble 
ac:ainst  the  judii^inent  of  their  customers.  A  l)ear  })anic  or  a 
bear  market  was  essentially  necessary  for  tlieir  success  as 
such  moves  wiped  out  the  ]\i]'>er  ]^rofits  of  their  customers, 
most  of  whom  were  perpetually  "long"  of  stocks,  or  chronic 
bulls.  These  concerns  were  simply  pfamblini!:  ])la<'es  whose 
backers  bet  their  capital  on  the  price  fluctuations  against  the 
capital  of  their  clients.  AVhen  l)ueket-sh(>ps  were  tolerated 
a  long  protracted  bull  mai'ket  usually  saw  a  great  mortal- 
ity in  their  number,  whilst  a  bear  market  found  them  sj^rout- 
ing  in  numbers  as  fast  as  mushrooms. 

In  the  grain,  cotton  and  coffee  markets,  the  position  of 
the  bulls  and  bears  is  a  reversal  of  that  occuined  in  the 
stock  market.  The  bull  on  these  staples  is  not  the  advance 
agent  of  prosperity.  He  does  not  expect  to  see  higher  ]iric- 
es  because  of  the  greater  out-turn  in  the  harvest.  Higher 
l^rices  come  to  him  as  a  result  of  a  shortage  in  crops.  The 
bear  is  really  the  bull  considered  in  the  light  of  the  benefit 
accruing  to  the  pul)lic  from  his  operations.  He  works  for 
lower  prices  on  his  expectations  of  a  bumper  harvest. 

You  will  be  interested  in  the  definitions  of  some  of  the 
principal  terms  employed  to  designate  trading  on  the  dif- 
ferent exchanges.  The  "longs"  and  the  "shorts"  are  other 
names  to  differentiate  between  the  bulls  and  the  bears.  The 
"longs"  buy  for  a  rise,  the  "shorts"  sell  for  a  deeline. 

"Ex  dividend"  means  that  on  the  given  day  when  a  cor- 
poration's books  close  for  the  payment  of  the  dividend  to 
all  stockholders  of  record,  the  stock  is  quoted  with  the  divi- 
dend deducted  from  the  price.  Unless  this  is  known  the 
lower  price  of  a  stock  selling  "ex  dividend"  is  likely  to  con- 
fuse the  uninitiated.    AVhen  Union  Pacific  declares  a  quar- 


INVESTMENTS  AND  SPECULATION  159 

terly  dividend  of  2^  per  cent  and  should  the  price  of  the 
shares  be  $175  the  day  previous,  tlie  day  the  books  close, 
Union  Pacitic  will  sell  ''ex  dividend,"  or  at  $172.50,  meaning 
that  the  $2.50,  the  equivalent  of  the  dividend  on  each  share, 
has  been  deducted.  It  is  the  same  when  a  corporation  de- 
clares a  stock  dividend  in  addition  to  a  cash  dividend.  Sears 
Roebuck  &  Co.,  in  1911,  gave  the  stockholders  a  stock  divi- 
dend amounting  to  about  the  equivalent  of  $12  a  share.  The 
day  after  the  stock  dividend  was  payable  the  stock  sold,  stock 
and  cash  "ex  dividend,"  or  about  $14  less  than  on  the  pre- 
vious days. 

"Rights,"  which  one  sees  frequently  mentioned,  denote 
the  market  value  of  the  pi'ivilege  accorded  to  stockholders 
of  record  in  a  corporation  to  purchase  additional  shares  it 
has  authorized.  In  value  these  rights  vary  in  accordance 
with  the  market  premium  the  stock  may  command. 

Of  course,  if  a  stock  is  selling  for  less  than  its  par  value, 
there  is  no  value  to  the  rights  to  subscribe  for  new  stock. 
But  with  some  corporations  such  rights  are  extremely  profit- 
able. It  has  been  estimated  for  some  years  back  that  besides 
their  cash  dividend  the  stockholders  in  such  a  prosperous 
corporation  as  the  Chicago  &  North- Western  have  received 
i-ights  to  more  stock  which  brought  their  average  return 
upon  their  investment  nearer  to  25  per  cent  than  7  per  cent, 
provided  that  they  availed  themselves  of  their  privilege  to 
sell  their  "rights." 

A  corporation  with  a  $100,000,000  capital  may  elect,  up- 
on the  favorable  vote  of  the  majority  stockholders,  to  in- 
crease its  capital  by  $10,000,000.  Each  shareholder  would 
then  have  the  privilege  to  take  ten  new  shares  for  each 
ratio  of  one  hundred  shares  owned.  If  the  stock  sells  for  $125 
the  market  value  for  one  Inmdred  shares  would  be  $12,500, 
and  for  ten  shares  $1,250.  Therefore,  if  a  corporation  offers 
its  shareholders  the  ])rivilege  to  take  the  newly  authorized 
stock  at  par,  the  rights  would  be  worth  $250  on  each  block  of 
ten  shares  or  $25  on  each  share. 


160  LOUIS  GUENTHER 

111  stock  inarkot  parlaiico,  tlioso  rij^lits  avo  also  ralk'd  a 
''iiicleii  ciittiiiLz:. "  'I'hcsc  "melons"  may  consist  of  new 
slock  (ii-  the  (listril)ution  of  a  lar^^^  extra  divicU'iKk  citlicr  in 
I'unn  (if  casli  or  stock.  Siicli  ])ros])ccts  fi'cfjiicntly  lead  to  a 
considcrahU'  out])nrst  of  s})ccukition  in  the  shares  wliich 
are  expected  to  receive  liberal  treatment. 

While  the  bulk  of  the  business  on  the  Stock  Kxchan.c:e  i^ 
transacted  in  tlic  unit  of  one  hundred  shares  or  niulti])le 
thereof,  there  is  also  considerable  business  done  in  smaller 
units  and  to  desii;nate  this  tradine;  the  term  "odd  lot"  or 
fractional  orders  has  been  coined  amonj::  brokers,  meaning 
the  purchase  or  sale  of  shares  in  less  number  than  one  hun- 
dred shares. 

An  "Irish"  dividend  is  a  term  of  sardonic  derision.  It 
stands  for  an  assessment  levied  by  an  embarrassed  cor])or- 
ation  on  its  stockholders  in  an  effort  to  re-organize  and  place 
itself  once  more  among  solvent  corporations. 

'^riien  there  are  such  contracts  as  "puts,"  "calls," 
"s]M-eads"  and  "straddles."  A  "put"  is  a  contract  which 
gives  the  holder  the  right  to  deliver  to  the  maker  »)f  the 
contract  a  number  of  shares  of  stock  at  a  s]iecitied  ]^rice 
within  a  limited  time.  On  the  other  hand  a  "call"  gives 
llie  holder  the  right  to  demand  from  the  maker  of  the  con- 
tract a  certain  number  of  sliares  at  a  specified  ]»rice  within 
a  limited  time. 

SjM'culators  often  make  such  contracts  with  <»th(M-s  as  a 
]>it'cautionaiy  measure  to  limit  their  losses.  The  buyei*s 
of  these  "]Mit"  and  "call"  coiiti-acts  ])ay  a  certain  ])iice  for 
this  privilege  to  demand  or  deHv(>r  stock  within  the  time  lim- 
ited by  the  contract. 

A,  for  exam]>le,  will  buy  one  hiindicd  shares  of  Amer- 
ican Tar  S:  Foundry  stock  for  $()0  a  sliai"(\  Tfe  may  not  wish 
to  take  more  than  a  loss  of  $5  on  each  share,  so  he  sells  a 
"put"  to  B  on  one  hundred  shares,  good  for  thirty  days  for 
$150.  Should  the  stock  decline  ]>elow  55  within  these  thii'ty 
days,  eacli  point  decline  re-i)resents  a  ]>rofit  to  V*  of  ^100  on 


INVESTMENTS  AND  SPECULATION  161 

the  one  Iniiidred  shares.  If  the  stock  goes  to  the  $50  a  share 
tlieii  B,  the  holder  of  the  "put"  can  go  into  the  market,  buy 
the  one  hundred  shares  at  a  cost  of  $5,000  and  deliver  it  to 
A,  the  maker  of  the  contract,  for  $5,500.  His  profit  then 
would  be  $500,  the  difference  less  the  cost  of  the  "put," 
$150,  and  the  broker's  commission,  $12.50,  or  $337.50.  Should 
the  stock  not  decline  during  the  term  of  his  contract,  he  is 
only  out  his  $150. 

The  operation  is  similar  in  a  "call"  contract.  A,  in  this 
instance,  will  sell  one  hundred  shares  of  Car  &  Foundry 
stock  at  $60  in  anticipation  of  a  decline  but  wishes  to  limit 
his  loss  to  $5,  that  is,  he  w^mts  to  protect  himself  against  any 
further  advance  than  $65  a  share.  So  he  sells  to  B  a  "call" 
contract  that  gives  B  the  privilege  of  calling  upon  him  for 
one  hundred  shares  at  any  price  above  $65  a  share  within 
the  specified  thirty  days.  Every  point  advance  above  $65 
represents  then  a  profit  of  $100  to  B,  less  the  cost  of  his 
call  and  broker's  commission. 

The  cost  of  such  privileges  varies  in  accordance  with 
the  duration  for  wdiich  they  are  given :  the  shorter  the  time, 
the  cheaper  the  price ;  and  the  longer  the  time  the  dearer  the 
price.  The  only  risk  involved  to  the  purchasers  of  these 
privileges  is  their  cost.  They  are  out  this  money  if  the  op- 
portunity to  exercise  their  privilege  at  a  profit  fails  to  offer 
itself  within  the  specified  time.  General  conditions  and  the 
technical  position  of  the  stock  market  usually  determine  the 
market  value  of  "put"  and  "call"  contracts. 

A  "spread"  is  a  privilege  to  combine  a  "put"  and  a 
"call"  contract.  The  holder  of  a  "spread"  has  paid  for  a 
privilege  for  a  certain  time  to  either  deliver  a  stock  at  a 
stipulated  price  to  the  maker  of  the  contract,  or  call  u2)on 
him  for  the  stock.  In  buying  a  "spread"  contract  the  pur- 
chaser expects  to  profit  through  a  large  advance  as  well  as 
a  decline.  In  either  case,  should  the  stock  pass  his  contract 
price,  he  could  execute  his  "spread"  and  take  his  profit, 
figured  on  the  same  basis  as  illustrated  in  the  "put"  con- 

B.VII— 11 


162  LOUIS  GUENTHER 

tract.  Slutuld  the  stock  l)<»tli  advance  and  decline  witliin 
the  contract  period  to  a  favoral>le  point  of  execution,  the 
lioldci-  of  a  "s])r('ad"  would  doubly  prolit,  but  should  it 
t(»U('li  neither  li;4Ui'<'  then  lie  is  out  the  money  the  "spread" 
has  cost  him. 

A  "straddle"  is  not  unlike  a  "spread"  contract,  except 
that  it  is  made  at  the  market  and  the  execution  of  either 
one  of  its  privilee^es  nullities  the  other.  The  cost  of  the 
"straddle,"  however,  is  the  most  expensive  of  any  of  these 
mentioned  privileges. 

These  contracts  are  favorites  with  small  speculators  who 
are  willing  to  assume  the  risk  the  privilege  cost  for  either 
a  "call"  or  a  "put"  on  a  stock  in  the  expectation  that  the 
chance  will  occur  during  the  life  of  their  contract  to  execute 
it  at  a  profit.  However,  such  privileges  ought  to  have  the 
endorsement  of  a  member  of  the  Stock  Exchange.  They  are 
only  good  if  the  maker  of  the  contract  is  himself  solvent. 

There  are  other  technical  terms  employed  in  the  Stock 
Exchange  operations,  but  they  are  of  minor  importance. 
The  reader  already  knows  what  a  margin  is,  also  that  inter- 
est must  be  paid  on  the  balance  of  securities  which  remains 
unpaid. 

"Ai-])itraging"  is  a  form  of  trading  requiring  the 
most  scientific  skill  and  rapidity  of  thought.  It  means  tak- 
ing advantage  in  the  difference  in  prices  on  the  same  se- 
curities between  two  markets,  and  may  be  transacted  profit- 
ably even  on  the  variation  of  a  slight  fraction.  The  princi- 
])al  arbitrage  business  is  done  between  New  York  and  Lon- 
don Stock  Exchanges. 


XXVII.     OPERATIONS  ON  OTHER  EXCHANGES. 

0])erations  on  the  grain  exchanges  are  for  future  de- 
liveries. AVheat,  corn  and  oats  are  dealt  in  according  to 
grades.  If  an  operator  buys  a  certain  number  of  bushels 
of  wheat  he  does  so  with  the  understanding  that  he  wall  ac- 
ee])t  and  settle  for  what  he  has  bought  on  or  before  de- 
livery day  wdien  the  wheat  must  be  tendered  him ;  vice  versa, 
he  agrees  to  deliver  the  w^heat  if  he  is  the  seller. 

All  deliveries  must  be  made  on  the  last  day  of  the  month, 
when  all  settlements  are  also  made  and  if  the  operator  is 
unable  to  meet  his  contracts,  it  is  at  once  a  confession  of 
insolvency  and  his  contracts  are  bought  in  for  his  account 
on  the  same  basis  of  settlement  as  on  the  stock  exchange. 

In  reading  over  the  grain  quotations  in  the  daily  press,  it 
is  to  be  noticed  that  the  grain  concerned  in  the  trading  is 
designated  by  different  months.  This  implies  that  all  sales 
and  purchases  are  for  the  wiieat  or  other  coarser  grains, 
wliich  must  be  settled  for  on  the  last  da}^  of  the  designated 
month. 

The  two  principal  crops  in  wheat  on  which  the  live- 
liest speculation  converges  are  the  Spring  and  Wiiiter 
wheats.  The  last  day  of  May  is  usually  an  important  day 
on  the  Chicago  Board  of  Trade,  for  it  is  settlement  day  for 
one  of  the  principal  crops.  In  size  the  Spring  wheat  crop 
is  the  smaller.  The  Winter  wheat  crop  is  the  lai'ger  of  the 
two. 

In  New  York  there  is  a  i)ro(luce  exchange  wliicli  was 
organized  at  the  height  of  our  large  export  business,  but 
with  the  falling  away  of  this  part  of  our  grain  business, 
trading  on  this  exchange  has  narrowed  considerably. 

It  seems  to  be  the  fate  of  large  agricultural  nations  for 
their  exports  of  agricultural  products  to  grow  smaller  as 

163 


164  LOUIS  GUENTHER 

tlicir  p(>pulation  iiiciTasos.  It  was  uot  so  many  years  ai^o,  it 
will  bo  renieinliered,  that  our  export  of  wheat  was  depended 
upon  by  financiers  to  establish  foi-  iis  a  lar^^e  credit  balance 
alirond,  tluis  providing  gold  to  ini})ort  when  it  was  most 
needed.  But  for  this  purpose  we  can  Tin  longer  depend  up- 
on our  wheat.  Tn  fact,  we  raise  now  only  one  important 
stai)le  which  we  still  sell  abi'oad  in  large  quantities  — tliat  is 
our  cotton. 

James  J.  TTill  al)out  hit  tlie  nail  nn  the  liead  when 
he  descrilx'd  our  decline  as  a  wheat-exporting  nation, 
when  he  said  it  was  to  be  expected  that  we  would  not  have 
much  to  spare  after  feeding  the  mouths  of  OO.OOO.OOO  jjeo- 
ple.  It  was  not  that  we  grew  less  wheat  but  we  wei-e  not 
keeping  pace  in  increasing  our  acreage.  AVe  are  a  nuich 
larger  family  t(>day  than  ten  years  ago  and  use  for  our  own 
domestic  i)urposes,  the  bulk  of  the  crop. 

Our  greatest  crop  in  quantity  is  corn,  but  we  do  not  ex- 
port as  much  of  it  as  wt  could  spare.  Our  corn  crop  has 
grown  steadily  until  now  it  causes  no  surprise  when  the  yield 
reaches  such  an  enormous  total  as  3,000,000,000  bushels  an- 
nually. 

The  value  of  our  harvest,  inchuling  all  the  live  stock  and 
dairy  ])roducts  was  last  year  estimated  by  the  government 
agrii'ultural  statistical  department  to  be  over  $9,(K)(),0()(),()00. 
Of  this  wealth  the  corn  cro])  alone  ciuiti'ibutes  nearly  20  per 
cent;  wheat  comes  next;  after  that  the  cotton  yield.  The 
value  of  such  minor  crops,  such  as  hay,  rye,  llaxseed,  etc., 
runs  into  the  hundreds  of  milli(His;  so  also  with  that  once 
despised  growth  of  uncultivated  fields,  alfalfa,  oi-  long  shoot 
grass.  The  hen  with  whose  industry  even  the  busy  city 
housewife  is  thoroughly  ae(juainted,  contributes  each  year 
nearly  $200,000,000  to  the  nation's  wealth. 

The  out-turn  of  our  fields  is  really  the  corner  stone  of  our 
prosperity.  As  it  is  all  new  wealth,  reproducing  itself  every 
year,  it  can  be  readily  seen  without  my  pointing  to  if,  how 
nuicli  every  artery  of  business  depends  upon  our  harvest  for 


INVESTMENTS  AND  SPECULATION  165 

its  life.  It  is  this  woaltli  which  supplies  the  blood  that  keeps 
trade  ^oinc:  along  briskly.  While  our  mining  industry  is 
second  in  importance,  its  prosperity  largely  depends  upon 
the  continuation  of  good  harvests. 

The  smaller  the  crops  we  raise,  the  more  diminished 
is  our  prosperity.  A  crop  failure  would  be  disastrous. 
Fortunately,  for  a  good  many  years  we  have  escaped 
such  a  calamity.  Our  imnuinity  from  such  a  misfortune 
for  nearly  twenty  years  is  largely  credited  to  the  grad- 
ual improvements  in  our  agricultural  methods.  Whether 
this  is  true  or  not  remains  to  be  demonstrated.  There 
are  many  who  doubt  that  this  is  a  logical  explanation 
and  the  consist(>ncy  of  the  weather  supports  at  least  to 
some  extent  their  skepticism.  But  this  is  neither  here  nor 
there.  The  point  I  wish  to  make  is  the  natural  evolution  in 
speculation  in  these  important  staples  in  which  the  opera- 
tors specializing  in  them  are  concerned  to  no  greater  extent 
than  are  the  operators  in  stocks  and  in  cotton.  For  them 
all  a  large  crop  spells  prosperity;  a  short  crop,  a  period 
of  adversity;  and  it  is  quite  natural  that  all  keep  a  sharp 
eye  on  the  weather  conditions  and  the  prc^liminary  crop 
estimates  which  the  Government  publishes  during  the  grow- 
ing season. 

But  the  large  grain  houses  do  not  rely  entirely  up- 
on the  Government's  figures.  The  majority,  to  supply 
their  clients  with  intelligent  information  as  to  the  progress 
of  the  different  crops,  employ  men  to  travel  over  the  crop 
belts  and  make  their  reports.  These  men,  because  of  their 
training  and  keen  perception,  have  acquired  the  reputa- 
tion of  being  crop  experts.  'A  number  of  them  fi-om  their 
reports  might  also  be  said  to  have  an  inclination  to  regard 
themselves  as  naturalists,  for  in  (heir  own  vernacular  they 
have  added  some  species  to  the  number  and  kinds  of  bugs 
and  insects  destructive  to  farm  products.  One  species  in 
]iarticular  is  the  June  bug,  which  very  few  people  knew  un- 
til the  crop  experts  discovered  it. 


166  LOUIS  GUENTHER 

"When  Rpi-iiif|j  Inirsts  upon  us,  the  crop  experts  get  busy, 
and  until  tlie  season  closes  and  the  several  crops  are  safely 
in  the  barns,  we  are  liable  to  have  a  half  dozen  crop  scares 
caused  by  the  different  conditions,  maybe  thi-ou^di  lack  of 
moisture,  bu<T:s,  a  protracted  dry  season  or  early  and  severe 
frosts.  Still,  were  it  not  for  all  these  elements  of  uncer- 
tainty interspersinc:  themselves  in  the  period  between  the 
seeding  and  the  final  harvest,  there  would  be  little  specula- 
tion. 

It  is  fi-om  these  uncertain  elements  that  differences  of 
opinion  arise  which  make  bears  of  some  people  and  bulls 
of  others,  while  with  stock  market  operators,  althouiih  only 
on-lookers,  th(\v  nevei'theless  form  their  judgment  as  to  the 
course  of  their  market  from  the  crop  prospects,  and  they 
strive  to  correctly  anticipate  them  in  their  conunitments. 
Furthermore,  there  are  a  large  number  of  industrial  cor- 
porations and  railroads,  known  as  the  granger  roads,  for 
they  largely  depend  for  their  principal  traffic  on  a  generous 
harvest,  whose  prosperity  is  vitally  wrapped  up  in  our 
crops.  For  that  reason  it  is  well  for  every  student  of  finance 
to  know  of  what  importance  the  crops  are  to  us. 

In  other  directions  is  the  attention  of  the  operator 
on  the  grain  exchange  drawm.  He  watches  the  progress  of 
the  harvest  in  Argentine,  Russia  and  Canada,  the  three 
countries  which  still  rank  as  the  large  exporting  nations, 
as  it  is  the  size  of  their  crops  which  affects  the  price  of  the 
sur])lus  in  our  crops  that  can  be  exported.  A  small  crop 
in  these  countries  means  higher  ]u-ices  for  what  portion  of 
our  cereals  we  can  sell  abroad. 

If  th(»  ])eople  of  Europe  took  UKU-e  kindly  t(^  corn,  we 
would  have  here  a  nucleus  foi-  an  extremely  imj^oi-tant  ex- 
port business.  I->ut  ])eo]de  abroad  do  not  take  kindly  to 
corn,  still  considering  it  largely  a  food  fit  only  for  live  stock, 
rather  than  for  human  beings. 

In  the  ])ro(luetioii  of  cotton  this  country  largely  retains 
itsmonoi)oIy.    "\\'e  have  only  one  competitor  worth  consider- 


INVESTMENTS  AND  SPECULATION  167 

ing— Eg}7')t,  and  eveu  there  the  cotton  crop  is  in  the  a^ejre- 
gate,  compared  with  ours,  of  small  proportions.  Our  cotton 
crop  runs  between  12,000,000,  to  17,000,000  bales  each  sea- 
son.   A  bale  weighs  about  500  pounds. 

Dealing  in  cotton  is  all  done  on  contracts  calling  for  fu- 
ture delivery  and  for  brevity  they  are  designated  in  the 
market  reports  as  *' futures."  The  quotations  are  divided 
into  points,  each  point  representing  one  cent  and  so  many- 
points  make  a  bale.  What  is  called  spot  cotton  means  cot- 
ton for  immediate  delivery  and  on  hand. 

There  are  two  princiijal  cotton  exchanges  in  this  coun- 
try—the Xew  York  Cotton  Exchange,  and  the  New  Or- 
leans Cotton  Exchange.  Between  them  a  considerable 
business  is  done.  The  operations  on  the  Liverpool  Cotton 
Exchange  are  closely  intertwined  with  the  dealings  upon 
our  own  cotton  exchanges,  for  Liverpool  is  the  greatest  dis- 
tributing market  for  our  enormous  exports  of  cotton.  The 
importance  of  our  principal  cotton  exchange,  which  is  the 
New  York  Cotton  Exchange,  as  a  center  of  speculation  is 
apparent  from  the  fact  that,  next  to  the  New  York  Stock 
Exchange,  its  memberships  command  the  highest  price. 

Among  the  other  exchanges  the  Boston  Stock  Exchange 
is  by  far  the  most  important.  The  principal  securities 
on  its  boards  are  largely  mining  stocks,  and  those  consist 
mostly  of  the  copper  stocks.  But  even  of  them  the  New 
York  Stock  Exchange  has  absorbed  a  large  number.  The 
transactions  there  are  along  lines  similar  to  those  on  the 
New  York  Stock  Exchange.  So  also  with  the  Chicago  Stock 
Exchange.  But  in  Chicago  we  have  an  exchange  with  an 
imposing  structure  for  its  home  but  transacting  very  little 
business.  This  exchange  has  never  recovered  from  the 
shock  it  received  at  the  time  the  ]\Ioore  Brothers  first 
took  their  flyer  on  a  large  scale  in  the  stock  market,  using 
the  Diamond  ^Fatrh  Co.  shares  as  their  object  of  manipu- 
lation. As  a  result  of  their  operations,  the  Chicago  Stock 
Exchange,  which  was  then  located  at  Dearborn  and  Monroe 


168  LOUIS  GUENTHER 

Streets,  was  foirod  to  close  its  doors  for  a  few  days  to  pre- 
vent a  panic.  All  the  brokers,  wlien  they  tried  to  liquidate 
thrir  Diamond  Match  Co.  stoek,  found  there  was  no  market 
upon  which  to  sell  and  the  exchanp'  sto])])ed  doint::  business 
temporarily,  to  enable  brokers  to  effect  jn'ivate  settlements. 
The  disastrous  experience  of  the  Mooi'e  Brothers  spread 
tile  belief  that  the  Cliica.ti;o  Stock  Exchan.u^e  did  not  ]>rovidc 
a  market  big  enouu:h  for  large  operations,  from  which  im- 
pression it  appears  never  to  have  recovered.  Even  at  the 
present  time  there  is  seldom  a  day  when  the  total  trans- 
actions reach  3,000  shares  in  all,  and  this  business  is  mostly 
done  in  securities  of  local  entc^-prises  whose  issues  are  not 
large  enough  to  w^arrant  their  listing  on  the  New  York  Stock 
Exchange. 

Conditions  on  the  Philadelphia  Stock  Exchange  are 
similar  but  not  in  sucli  a  pronounced  form.  'J'hc  ]>rin- 
cipal  securities,  like  Lehigh  Valley  and  the  Philadelphia 
Company,  which  were  once  the  popular  stocks  on  this  ex- 
change, have  finally  found  their  way  to  New  York  City 
which  seems  to  be  the  logical  center  for  all  securities,  and 
to  which  thev  final h'  come  when  readv  for  the  broadest 
market. 

There  are  smaller  exchanges  in  llic  other  Icp.ding  cities 
like  Cleveland,  Cincinnati,  Pittsbui-g,  and  Si.  J^ouis,  but 
the  business  done  on  them  is  in  small  proportions  and  hard- 
ly worth  mentioning.  Even  that  small  business  is  all  in 
local  securities.  AN'hilc  all  these  points  are  important  fi- 
nancial centers,  most  of  the  transactions  in  S(*curitics  are 
made  over  the  counters  of  the  investment  concerns. 

'^riie  y(tunger  members  of  the  Pittsburg  Stock  l-^xchange 
tried,  in  the  h(>pe  to  revive  operations  on  a  more  extended 
scale,  to  introduce  dealings  in  mining  shares.  For  a  while 
their  plans  met  with  partial  success,  but  it  was  a  dangerous 
Innovation,  as  results  soon  ]n-oved. 

As  most  of  the  shares  were  in  mining  enter})rises  in  the 
early  development  stages,   the   operations  resulted  disas- 


INVESTMENTS  AND  SPECULATION  169 

troiisly  ill  most  cases  to  all  who  participated  in  the  specula- 
tion, and  this  was  mainly  caused  by  the  enthusiasm  of  the 
brokers,  who,  although  ignorant  in  the  first  i:>lace  of  the 
fact  that  such  securities  are  in  most  cases  precarious  specu- 
lations, still  were  desirous  to  give  them  a  rousing  introduc- 
tion by  a  campaign  of  manipulation  which  ran  prices  up  to 
excessive  heights.  The  fall  was  sudden  and  disastrous.  The 
exchange  has  not  yet  recovered  from  this  ill-starred  episode. 

San  Francisco  has  a  mining  exchange,  where  the  nature 
of  the  mining  business  is  better  understood,  and  as  the  city 
is  the  natural  banking  center  of  the  industry,  it  is  also  the 
logical  market  for  these  securities.  There  is  a  smaller  min- 
ing exchange  in  Salt  Lake  City,  and  one  also  in  Butte, 
Mont.,  and  one  in  Duluth,  Minn. 

The  development  in  the  oil  industry  in  California 
brought  into  existence  an  exchange  for  dealings  in  oil  stocks. 
Whether  it  is  to  become  a  permanent  exchange  remains 
to  be  seen.  AVlien  oil  was  first  discovered  in  Penusvlvania, 
Oil  Citv  had  an  oil  exchange  and  it  thrived  while  the  excite- 
ment  lasted.  But  as  an  important  factor  it  passed  away 
with  the  collapse  of  the  oil  boom.  Such  was  also  the  case 
in  Beaumont,  Tex.,  when  oil  was  first  discovered  in  that 
part  of  the  state.  It,  too,  went  out  of  existence  with  the 
passing  of  the  boom. 

With  a  brief  mention  of  the  New  York  and  Boston  Curb 
markets,  I  shall  have  finished  with  the  i>rineipal  ex- 
changes in  the  country.  The  New  York  Curl)  is  a  j^e- 
culiar  institutioii.  Tiitil  the  present,  there  has  Ix'cn  no 
sort  of  control  over  it.  The  brokers  who  traded  there 
were  under  no  rules  of  restraint  whatever.  Any  secu- 
rity could  be  listed  there,  for  what  a  listing  meant  was 
merely  that  some  broker  introduced  it  to  the  other  brokers 
who  were  billing  to  execute  orders  in  it.  If  there  was 
enough  business  in  old  clothes  and  shoes,  they  could  just 
as  well  have  executed  orders  in  them,  if  there  was  any 
money  to  be  made.    A  market  as  lax  as  this  could  not  es- 


170  LOUIS  GUENTHER 

cai)o  bocomintc  the  scene  of  a  large  number  of  finaneial 
scandals  which  \vas  nnfortunate  for  its  own  prosperity,  as 
the  crookedness  revealed,  in  the  end,  drove  the  ]ni])lic  away 
when  it  realized  no  efforts  were  made  to  protect  investors 
from  financial  sharks. 

Fortunately  for  the  Curb  market,  which  can  be  made 
an  important  market,  an  important  reform  was  inaugurated 
in  the  formation  of  an  organization  to  supervise  its  con- 
duct, pass  upon  all  securities,  and  the  character  of  brokers. 
This  will  restore  the  market  in  public  confidence,  provided 
the  reforms  inaugurated  are  vigorously  enforced.  Quite 
an  array  of  securities  now  listed  on  the  Stock  Exchange 
have  found  their  way  there  through  the  Curb  market,  where 
they  made  their  first  bow  to  the  public. 

The  Boston  Curb  market  was  organized  along  this  line  a 
year  ago  and  is  now  housed  in  a  building.  AVhik'  a  few  in- 
dustrial stocks  are  dealt  in  on  both  these  markets,  the  \n-m- 
cipal  listings  are  in  mining  stocks. 

The  most  important  market  for  our  securities  abroad  is 
in  London.  There  some  of  them  are  listed  on  the  Stock 
Exchange;  the  greater  numl)er,  however,  are  listed  on  the 
Curb.  There  is  a  difference  in  tiuK^  between  these  markets 
of  about  five  hours,  a  sufhcient  margin  for  trading  between 
the  two.  American  traders  will  sometimes  sell  in  London 
five  hours  ahead  of  the  New  York  market  and  buy  their 
stocks  back  in  Xew  York  the  same  day,  expecting  to  j^n^fit 
by  a  decline  here  as  a  cause  of  a  weak  opening  in  our  stocks 
ill  London. 

The  London  market  quotations  sometimes  exert  a  pro- 
nounced inlluence  u])on  (►ur  own  shares,  and  consequently 
stock  uini'ket  operators  closely  watch  Ijondon  ])rices  which 
are  on  hand  liefore  our  own  dav's  business  sessi(m  bcLrins. 

There  is  some  dealing  on  the  Berlin  Bourse  in  the  Ameri- 
can stocks,  but  not  to  an  extent  worth  menti<tning.  Of  late, 
France  has  shown  considerable  interest  in  our  securities,  a 
few  of  which  have  succeeded  in  forcing  their  way  into  the 


INVESTMENTS  AND  SPECULATION  171 

sacred  jiroriiiet  of  tlio  ''parqiiotto,"  which  is  the  Bourse 
proper.  But  the  majority  of  American  securities  in  the 
Paris  market  are  still  kicking  their  heels  out  on  the 
"Coulisse,"  which,  as  a  market,  corresponds  to  our  Curb. 

IT(^lland,  next  to  England,  is  the  most  important  market 
for  American  securities. 


XXVIII.     PANICS. 

There  are  two  kinds  of  panics— one,  a  commercial  or 
business  panic,  the  other,  a  stock  market  panic.  A  com- 
mercial panic  affects  the  country  as  if  it  were  stricken  with 
paralysis.  In  most  cases  it  is  superinduced  Ijy  over-ex- 
pansion. A  stock  market  panic  is  an  affair  more  localized, 
whose  injurious  influences  may  prove  of  temporary  dura- 
tion oidy. 

Some  economic  theorists  attribute  the  responsi])ility  for 
business  panics  to  an  excess  of  speculati(>n.  I  am,  however, 
inclined  to  the  opinion  that  specidation  is  rather  the  s\nnp- 
tom  of  it  than  the  actual  cause.  It  is  a  human  trait,  durin.LC 
prosperous  periods,  when  money-makinc:  becomes  a  com- 
paratively easy  task,  to  keep  on  expanding  as  long  as  cap- 
ital can  be  borrowed  with  which  to  spread  out. 

The  result  is  an  excess  in  speculation.  The  easier  profits 
come,  the  more  daring  is  the  use  for  which  they  are  em- 
ployed. Afen,  who  have  accunuilated  their  foi-tunes  rapidly, 
are  anxious  to  doul)l(»  their  wealth,  then  tri]ilo  it  and  then 
rpiadruplc  it.  The  more  they  make,  tlic  inoi-c  they  want,  us- 
ually. Tlicy  blindly  ])luuge  ahead  without  considering  that 
the  r)ace  thev  set  cannot  alwavs  be  maintained.  Thev  raise 
their  structures  on  weak  foundations.  Therefore,  th(\v  are 
totally  un])i-e])arcd  to  withstand  any  ]iressui'e  placed  upon 
theii-  resources  bv  a  sudden  tinhtenintx  in   the  su])])lv  of 

a  11* 

ca])it;il,  of  which  they  have  been  free  ])orrowers  and  they 
quickly  tind  themselves  financially  embarrassed. 

Creditors  demand  their  monev;  thev  cannot  alwavs  get 
it.  As  other  creditors  are  in  tui*n  dependent  U]ion  them, 
they  are  quickly  and  similarly  affected.  Like  a  ])rairie  fire, 
financial  embarrassment  tlu^n  Jnni])s  from  one  ]dace  to  an- 
other, hurtling  over  wi-ak  business  structures  and  impairing 

172 


INVESTMENTS  AND  SPECULATION  173 

sound  ones.  A  policy  of  drastic  curtailment  is  luiriiudly 
euforced  in  every  direction.  Capital  grows  extremely  ap- 
prehensive and  is  not  ol^tainable  except  at  usurious  rates 
of  interest  and  only  on  gilt-edged  collateral.  Fear  also 
largely  enters  as  a  factor  into  a  business  panic.  In  fact  it 
is  from  fear  the  name  "panic"  originates.  There  is  a  sud- 
den rush  of  creditors  for  their  storm  cellars  and  when  such 
stampedes  occur,  values  are  sacrificed  and  often  go  begging. 
It  is  then  that  the  unprotected  suffer  the  most.  They  are 
com2:)Osed  of  that  class  of  borrowers  who  have  borrowed 
until  they  have  nothing  left  in  reserve— no  other  collateral 
to  offer  to  protect  their  outstanding  loans  when  pa\inent 
is  demanded  without  delay. 

Here  we  find  a  real  estate  operator  forced  into  banli- 
ruptcy  because  he  was  over-extended,  there  a  wholesale 
merchant,  and  at  another  point  a  large  retail  merchant. 
Banks  are  discovered  to  be  in  a  weak  position,  for  their 
loans  are  in  collateral  which  cannot  be  marketed  quickly 
and  their  reserve  in  cash  is  at  such  a  low  ebb  they  cannot 
lung  withstand  a  run  from  affrighted  depositors.  All  this 
is  the  psychological  side  of  a  panic. 

While  i)anics  are  largely  the  logical  outcome  of  over- 
expansion,  the  severity  of  their  effect  is  produced  by  fear. 
This  is  demonstrated  frequently  enough  in  the  process  of  re- 
adjustment following,  when  embarrassed  ventures  are 
brought  back  to  solvencv  without  aiiv  loss  to  the  creditors. 

Nor  do  panics  often  throw  ])efore  them  the  shadows  of 
their  coming.  They  more  generally  burst  upon  us  un- 
heralded and  when  least  expected.  The  first  signs  of  our 
last  panic,  that  of  1907,  appeared  in  March,  when  there  oc- 
curred a  sharp  and  sudden  ])i'eak  in  the  prices  of  securities, 
for  what  reason  few  at  the  time  were  aware  and  others  only 
half  surmised.  The  real  cause  was  the  sudden  demand  for 
a  large  amount  of  capital  from  interior  banks  when  the  fi- 
nancial centers  were  unpi-epared  to  meet  it. 

It  may  be  somewhat  difficult  to  those  unacquainted  with 


174  LOUIS  GUENTHER 

our  intricate  financial  machinery  to  detennine  liow  a  sud- 
den demand  for  money  can  affect  securities  so  seriously. 
But  it  will  !)('  better  understood  when  some  light  is  thrown 
on  our  peculiar  banking  structure.  Our  national  banks  are 
compelled  to  maintain  a  certain  per  cent  of  their  deposits 
at  the  reserve  centers.  The  ])anks  in  which  they  keep  these 
deposits  allow  interest  on  them  while  tliey  in  turn,  to  earn 
this  interest,  must  lend  it  out  in  demand  loans,  which  loans 
are  principally  upon  securities  having  an  active  market. 

Thus  it  happens  that  loans  on  such  securities  are  the 
first  to  be  called.  The  borrowers,  finding  their  loans  called, 
find  they  cannot  borrow  elsewhere  and  are  forced  to  sell 
their  collateral  for  what  they  can  obtain.  They  have  no 
other  recourse.  Such  were  the  conditions  on  the  day  in 
March,  1907,  when  the  first  signs  appeared  in  the  stock 
market  of  the  panic  of  that  year.  In  Octol)er  when  the  pres- 
sure could  no  longer  be  withstood  it  burst  in  all  its  fury. 
It  required  almost  a  year  and  a  half  for  the  country  to  get 
over  its  worst  effects.  The  recuperation  has  been  slow% 
as  it  always  is,  as  it  takes  some  time  before  the  damage  can 
be  repaired. 

That  the  stock  market  should  furnish  the  first  warnings 
of  a  panic,  is  but  natural.  It  is  here  in  the  first  place  where 
over-speculation,  the  most  pronounced  symptom  of  a  ])anic 
converges  and  as  it  is  a  quick  market  it  is  here  also  that 
lenders  of  capital  hurriedly  rush  to  liquidate  their  loans, 
and  tret  their  monev  back.  Months  afterwards  the  effects 
begin  to  make  themselves  felt  at  distant  points. 

Imagine  a  i>ool  of  water  into  which  a  pebble  is  cast,  ^t 
first  the  ])ebble  makes  a  small  ri])ple  l)ut  rapidly  one  ripple 
after  another  is  formed  each  in  larger  dimensions  until 
finally  the  entire  edge  of  the  pool  is  affected.  This  is  exact- 
ly what  ha]>])ens  in  a  business  panic:  first  to  be  affected  are 
the  financial  centers,  then  its  circle  of  influence  extends 
further,  until  finally  the  whole  country  is  engulfed. 

But  with  all  their  bad  effects,  panics  arc  useful,  since 


INVESTMENTS  AND  SPECULATION  175 

they  are  viewed  as  necessary  at  times  to  bring  about  an  ad- 
justment between  industry  and  caj^ital  available  for  its  ex- 
})l()itation  and  such  I'eadjustnu^nts  come  at  varying  inter- 
vals. I  shall  not  here  enter  upon  a  long  discussion  a])out 
the  causes  back  of  panics  and  some  of  the  remedies  proposed 
to  ward  them  off.  This  subject  can  be  better  left  to  others, 
for  it  could  be  extended  into  chapters  while  the  space  at 
my  command  is  limited.  I  shall,  however,  touch  upon  the 
agitation  for  a  Central  Bank  as  one  of  the  means  to  prevent 
panics  and,  if  it  cannot  accomplish  this,  it  can  at  least  tem- 
per the  severity  of  their  effects.  The  idea  in  back  of  a  Cen- 
tral Bank  is  to  provide  a  citadel  of  financial  strength  that 
could  be  depended  upon  to  automatically  expand  or  contract 
credit  facilities.  In  England,  France,  Germany  and  the 
other  continental  nations  are  such  institutions.  Wliile  they 
do  not  succeed  in  staving  off  a  period  of  business  stagna- 
tion, thev  at  least  demonstrate  that  thev  can  minimize  the 
harm  through  their  note-making  powers. 

We  need  some  like  institution  patterned  along  some- 
what similar  lines  in  this  country  which  through  its  credit 
facilities  could  extend  aid  wdiere  most  urgently  needed  and 
required.  As  incoherent  as  is  our  banking  system  today, 
our  ])anks  attem]^t  the  functions  of  a  Central  Bank  iii  a 
panic  through  their  associations  and  by  means  of  clearing- 
house checks  that  temporarily  take  the  place  of  money  un- 
til all  danger  of  large  withdrawals  of  deposits  has  passed. 
This  was  done  in  the  panic  of  1907  as  well  as  during  a  num- 
ber of  previous  panics. 

If  we  can  consider  that  there  are  any  visible  forerunnc^rs 
of  panics,  carrying  warnings  ahead  of  their  coming,  I  should 
say  that  they  would  make  themselves  apparent  in  at  least 
three  forms,  namely,  an  excess  of  laud  speculation,  exces- 
sive interest  rates  and  an  abnormal  shrinkage  in  the  re- 
serves held  by  the  banks.  These  reseiwes  are  the  percentage 
of  cash  to  the  amount  of  deposits  on  hand  to  meet  the  de- 
mand from  depositors.    But  these  indications  are  not  in- 


176  LOUIS  GUENTHER 

fallible,  for  it  has  often  occurred  lli;it  wiiore  there  existed 
nil  the  e()iiditi<nis  poiiitiii};  to  a  panic,  a  j>anic  ncvci*  oc- 
curred, for  correctives  Avcrc  apjilicd  in  time. 

^^^lat  makes  au  excess  in  land  speculation  a  dau,ii:ei'ous 
lueuace,  is  that  it  is  the  uiost  unli([ui(lal)le  form  (d'  collateral 
of  any  for  loans  in  hard  times.  Buyers  caun<tt  he  found 
"when  they  are  Avanted.  Land  speculation  is  also  the  last 
extreme  of  speculation.  It  marks  the  period  of  s])eculative 
excesses.  Theref(U-e  its  proii^ress  is  closely  watched  by  keen 
students  of  financial  conditicnis. 

The  tii;htenin,u-  in  interest  rates  denotes  a  p:rowin<;-  scar- 
city of  available  ca]ntal.  Money  follows  the  law  of  su]ii)ly 
and  demand,  as  it  is  but  a  commodity  in  the  tinal  analysis. 
If  there  is  plenty  of  money,  interest  rates  are  low  and  coi*- 
respondiuLily  they  increase  as  it  becomes  scarce.  The  dif- 
ference between  loans  and  deposits  of  the  banks  shows  their 
availa])le  cash  resources.  The  smaller  the  difference,  the 
greater  the  dancjer  to  business  and  the  weaker  is  the  struc- 
ture to  withstand  the  assaults  of  a  panic  or  fear  on  the  part 
of  creditors. 

Corners  Can  Cause  Stock  Market  Panics. 

Stock  market  panics  can,  however,  take  ]>lace  without 
disturbing  the  country's  prosperity.  Their  bad  effects  can 
be  localized.  But  such  flui-ries  of  fright  are  largely  caused 
by  the  attempt  on  the  ]X\rt  of  daring  spc^culators  or  power- 
ful financial  interests  to  corner  certain  stocks. 

The  Xoi'thern  Pacific  corner  is  an  exami)le  of  this.  The 
late  i;;.  It.  Ilarriman,  to  prevent  himself  from  being  ex- 
cluded as  a  railroad  factor  from  the  Northwest,  made  au 
effort  to  buy  enough  shares  in  the  open  market  to  acquire 
control  of  the  Xoi-thern  Pacific.  0]i]-)osing  his  efforts  were 
James  T.  Hill  and  and  J.  P.  iSforgan,  who  in  turn  wei-e  buy- 
ing all  the  stock  they  could  lay  hands  on  to  ])revent  Ilarri- 
man's  securing  control.  A  good  deal  more  stock  was  sold  to 
both  by  s]")eculators  than  there  was  authorized  by  tlie  r<»ad 
or  was  outstanding,  willi  the  result  that  when  the  time  for 


INVESTMENTS  AND  SPECULATION  177 

the  delivery  of  the  shares  drew  near  the  sellers  began  to 
scent  the  scarcity  of  the  stock  and  began  frantically  to  bid 
for  what  they  had  sold  and  could  not  deliver,  bidding  it  up 
rapidly  until  it  touched  a  price  of  $1,000  a  share.  The  day 
will  long  be  remembered  in  the  annals  of  the  New  York 
Stock  Exchange,  as  it  was  a  day  of  intense  fear  and  demor- 
alization. It  meant  the  ruin  of  a  great  many  Stock  Ex- 
change members  if  they  could  not  get  the  shares  of  North- 
ern Pacific  they  sold  and  in  turn  would  have  dragged  dowm 
to  bankruptcy  other  members  who  were  not  concerned  in 
the  Northern  Pacific  speculations  but  were  large  creditors 
of  the  members  who  were  involved.  The  warring  financial 
interests  were  aware  of  the  dangerous  conditions  and  ar- 
ranged matters  so  that  a  private  settlement  could  be  effected 
and  l\v  their  efforts  the  danger  of  a  great  many  failures 
was  averted.  The  panic  lasted  but  a  day.  Beyond  the  Stock 
Exchange  it  did  not  extend.  The  only  individuals  injured 
were  the  stock  market  speculators.  Yet  the  case  clearly 
illustrates  how  a  panic  might  occur  on  the  Stock  Exchange 
and  go  no  further. 

But  corners  are  very  dangerous  things  to  attempt.  They 
verv  seldom  succeed.  A  corner,  to  be  successful  must  be  so 
operated  that  the  security  whose  price  was  bid  up  to  a  high 
figure  can  be  in  turn  sold  readily.  It  happens  at  times  where 
this  is  impossible. 

]\lany  corners  have  been  attempted  on  the  Chicago  Board 
of  Trade.  *'01d  Hutch,"  as  Mr.  Hutchinson,  a  wary  spec- 
ulator was  nick-named,  tried  it  a  number  of  times  only  to 
find  himself  penniless  in  the  end. 

Young  "Joe"  Leiter  had  the  idea  that  a  crop  of  wheat 
would  not  reach  its  usual  proportions,  so  he  kept  on  buy- 
ing all  the  wheat  that  the  other  traders  were  willing  to  sell 
him  and  which  had  to  be  delivered  to  him  on  a  certain  day. 
On  paper  his  profits  ran  into  the  millions.  To  turn  those 
profits  into  c<ash  his  coraer  depended  ui>on  the  ina))ilify  of 
those  who  sold  him  their  wheat  to  make  deliveries  which 

B.  VII— 12 


178  LOUIS  GUENTHER 

would  force  thorn  to  buy  it  hiwk  from  liim  to  make  their  con- 
tra ets  good. 

But  wlien  the  final  dav  for  delivery  came  around,  wheat 
poured  in  upon  Leiter  from  jjlaces  he  never  expected  any 
existed.  Elevators  were  ransacked  for  wlieat  and  rushed 
in  cars  to  Chicago.  There  was  such  a  deluge  of  the  cereal 
upon  the  young  speculator  that  his  wheat  corner  was  quick- 
ly knocked  to  pieces  and  instead  of  profits  in  the  millions, 
Leiter  lost  all  his  fortune  and  a  few  millions  which  his 
wealthy  sire  had  to  put  up  to  square  his  son's  accounts. 

Another  spectacular  speculator  who  came  to  grief  on  the 
Chicago  Board  of  Trade  as  the  result  of  his  efforts  to  corner 
wheat,  was  "Ed"  Patridge.  Most  of  us  still  remember  the 
Waterloo  which  overtook  Sully  when  he  attemj^ted  to  cor- 
ner the  available  cotton  crop. 

There  have,  th(^ugh,  been  men  who  successfully  operated 
corners.  One  of  these  speculators  is  Charles  Patten,  the 
Chicago  speculator.  He  has  cornered  oats,  wheat  and  cotton 
successfully  in  their  turn  and  has  reaped  millions  as  his 
gains  for  his  daring.  He  now  claims  he  has  withdrawn 
from  the  market.  If  he  holds  to  this  resolution  he  will 
retain  his  millions,  but  should  he  venture  back  into  the  Pit 
and  try  to  repeat  his  s]">eculative  coups,  there  arc  many  who 
believe  he  would  lose  what  he  lias  by  trying  to  nin  a  corner 
once  too  often. 

It  is  fortunate  that  the  Stock  Exchange  does  not 
tolerate  any  attempts  to  corner  a  security,  as  it  realizes  the 
harm  which  could  arise  from  such  attem])ts.  Through  its 
discretionary  power  it  can  enforce  private  settlements  and 
largely  interfere  with  the  profits  which  could  be  made  from 
a  corner  and  this,  of  course,  discourages  any  deliberate  and 
preconceived  ])lan  to  bring  about  a  corner.  The  Xorthern 
Pacific  corner  served  as  a  good  lesson  towards  this  end. 


XXIX.     POOLS  AND  MANIPULATIOX. 

A  great  deal  of  the  speculation  on  the  New  York  Stock 
Exchange  is  artificial.  By  this  I  mean  that  it  fails  to  reflect 
the  actual  transaction  in  securities  by  the  trading  public. 
Such  artihcial  speculation  aims  to  incite,  through  a  display 
of  activity,  a  buying  or  selling  movement  in  certain  secu- 
rities and  then  leaves  the  attainment  of  its  pur2:)ose  to  the 
imi)etus  such  efforts  have  started. 

A  number  of  brokers  will  often  organize  what  we  call 
a  pool,  to  exploit  certain  stocks.  ^lany  such  pools  are  con- 
stantly operating  in  the  stock  market,  especially  when  the 
trading  is  active.  These  pools  work  with  great  cleverness.. 
They  pull  their  strings  behind  the  scenes  and  only  the 
shrewdest  market  observers  can  trace  their  operations. 

Only  when  some  cog  in  their  plans  slips,  as  occurred 
in  the  case  of  the  Cohunbus  &  Hocking  Coal  &  Iron  pool, 
does  the  public  get  any  inkling  of  how  pools  operate  and 
then  when  their  operations  become  known,  the  revelations 
do  not  always  reflect  credit  upon  the  Stock  Exchange. 

What  happened  to  the  Columbus  &  Hocking  Coal  &  Iron 
1)001  was  this:  The  members  of  this  pool,  after  they  had 
succeeded  in  rigging  the  price  of  the  company's  stock  to 
over  $90  a  share,  and  they  began  to  suspect  that  the  pub- 
lic could  not  be  induced  to  buv  their  stock  at  fancv  prices 
grew  apprehensive  about  how  they  were  to  get  rid  of  their 
holdings,  and  to  get  out  whole,  started  to  betray  one  anntlier 
in  their  selfish  desire  to  protect  themselves.  AVIkti  this 
treacliery  become  known,  tli(M-o  was  a  sudden  rusli  to  sell 
and  within  a  few  minutes  the  i)o(»I  was  smashed.  Tlic  stock, 
whicli  only  an  houi-  lu'Tnic  bad  been  quoted  around  $90, 
declined  rapidly  and  did  not  stop  until  it  touched  a  price 
around  $10  a  share.    Two  Stock  Exchange  firms  which  were 

179 


180  LOUIS  GUENTHER 

financing  the  pool  failed,  while  James  R.  Keene,  the  pool's 
manager  and  manipulator,  lost  not  only  a  big  slice  of  his 
fortune,  but  a  goodly  part  of  his  reputation  likewise. 

To  be  successful,  a  pool  must  sell  its  accumulated  hold- 
ings to  the  public  at  a  profit,  but  in  this  it  does  not  always 
succeed,  since  the  public  is  at  times  too  wary  to  be  caiight. 

An  amusing  instance  showing  what  strange  effects  can 
sometimes  be  brought  about  by  a  slight  misha]'*  in  orders 
given  by  a  pool,  occurred  in  1910  in  the  preferred  shares 
of  the  Rock  Island  Company.  It  seemed  that  on  the  night 
before  this  incident  happened,  a  leading  operator  in  this 
stock,  wiio  was  managing  this  pool,  ])laced  large  buying  or- 
ders in  the  stock  with  different  Stock  Exchange  members, 
but  forgot  at  the  same  time  to  give  enough  selling  orders  to 
balance  the  fluctuations  in  the  stock  so  as  to  make  them 
api)ear  nonnal  and  not  arouse  any  suspicions.  AYhat  took 
place  was  startling.  The  sinniltaneous  appearance  of  these 
large  buying  orders  without  any  offerings  of  the  stock,  re- 
sulted in  a  sky-rocket  advance  of  $30  a  share  in  the  pi-ice 
in  less  than  fifteen  minutes  and  when  it  became  knowTi  that 
a  serious  blunder  had  been  made  in  the  distribution  of  the 
orders,  there  was  a  foot-ball  rush  to  sell,  the  stock  sliding 
back  quickly  to  the  price  from  which  it  had  started  but  a 
quarter  of  an  hour  previously.  The  error  ever  after  put 
the  stock  under  suspicion.  The  ]iublic  would  have  none  of 
it  and  for  months  afterwards  Rock  Island  shares  were  care- 
fully shunned  by  speculators. 

The  way  j)ools  operate  is  interesting.  A  group  of  Stock 
Exchange  members  will  agree  to  form  a  pool,  which  in 
some  instances  they  call  a  S}Tidicate,  to  provide  a  more 
dignified  tone  to  their  scheme.  Pools  are  not  always  formed 
by  meml)ers;  they  may  be  organized  )\v  speculat(U'S  as  wtU 
who  in  no  way  arc  affiliated  with  the  Stock  Exchange. 
Each  member  of  the  pool  agrees  to  handle  a  certain  amount 
of  the  stock  in  which  the  pool  is  interested  and  these  orders 
are  distributed  at  scale  prices  over  a  certain  period  of  time. 


INVESTMENTS  AND  SPECULATION  181 

In  this  manner  efforts  are  made  to  induce  activity  towards 
whatever  direction,  up  or  dowTi,  the  pool  plans.  If  the 
pool's  plans  are  successful  and  it  has  succeeded  in  distri])u- 
i'mg:  at  a  pi'ofit  wliat  stock  was  pTirchased,  or  has  covered 
what  stock  was  sold  short  at  a  profit,  a  distribution  is  made 
among  the  members. 

Sometimes  a  pool  makes  enormous  profits.  The  losses 
are  equally  great  where  a  pool's  plans  meet  with  defeat. 
A  powerful  pool  was  organized  in  United  States  Steel  com- 
mon stock  in  1907,  in  the  midst  of  the  panic.  This  pool,  for- 
tified with  millions  of  capital  and  aided,  as  some  authorities 
claim,  by  the  Steel  Corporation  itself,  which  through  its 
charter  is  empowered  to  deal  in  its  ovm.  securities,  persis- 
tently bought  all  the  stock  coming  upon  the  market.  This 
buying  kept  United  States  Steel  conunon  stock  like  a  rock, 
withstanding  all  pressure,  around  $20  a  share  throughout 
these  parlous  days. 

The  firmness  in  the  price  of  the  stock  had  the  desired  in- 
fluence when  confidence  and  reason  again  returned.  The 
strength  of  United  States  Steel  common  stock  was  a  topic 
that  was  on  every  one's  lips  and  firmly  implanted  in  the 
public's  mind.  The  stock  became  the  popular  speculative 
mediiun  and  steadily  advanced  in  market  value  until  it 
touched  a  price  near  $95  a  share.  In  the  interval,  the  rise 
in  the  stock  was  assisted  by  a  mnnber  of  increases  in  its 
dividend.  The  millions  the  pool  had  to  Tise  to  support  the 
stock  were  nuiltiplied  a  numl)er  of  times  by  the  advance 
in  its  value  which  followed. 

In  some  financial  quarters  pools  and  their  purposes  are 
justified  by  the  claim  that  the  public  will  not  notice  a  secu- 
rity, irrespective  of  what  merit  it  possesses,  unless  there  is 
some  leadership  and  it  is  such  leadership  they  aim  to  supply. 

Probably  there  is  some  logic  in  their  contention.  Yet 
not  all  pools  arc  organized  on  such  a  praiseworthy  ]^lan. 
Quite  often  they  are  formed  to  inveigle  the  trading  public 
with  some  security  at  prices  wholly  out  of  proportion  to 


182  LOUIS  GUENTHER 

tlu'ir  intrinsic  vnlues.  Most  of  tlic  criticism  involving  tlio 
New  York  Stock  Kxclianuc  in  recent  vears  mav  be  directlv 
traced  to  operations  of  this  cliarafter. 

Pools  arc  largely  responsible  for  tin-  niani]»nlatiou  in 
stocks,  about  which  so  much  is  written  and  which  is  so  fre- 
quently mentioned  in  the  financial  reviews  in  the  daily 
press.  The  weight  of  their  orders  makes  a  stock  rise  or  fall 
and  often  to  such  an  extent  as  to  frighten  real  holders  to 
throw  their  shares  onto  the  market  or  cause  a  scurrving  to 
buy  in  anticipation  of  a  good  advance.  Pools  work  upon 
the  avarice  and  credulity  of  the  public  or  on  its  fears. 

Before  Governor  Hughes  of  New  York  State  apprnnted 
a  conmiittee  of  citizens  to  investigate  the  operation  on  the 
Stock  Exchange  with  the  purpose  of  recommending  re- 
forms for  the  protection  of  the  pul)lic,  pools  were  all(>wed 
to  carry  on  their  mani])ulations  with  almost  no  restraint 
whatever.  "While  ''wash"  sales  and  "matched"  orders  were 
not  openly  tolerated,  they  were  secretly  connived  at  and  per- 
mitted. 

"Wash"  sales  are  sales  where  two  or  moi-e  members 
p:o\  together  to  buy  or  sell  stocks  between  thems(>lves  to  es- 
tablish quotations  so  that  they  may  be  reported  in  the  offi- 
cial transactions  of  the  Stock  Exchange.  This  is  also  true 
with  "matched"  orders,  which  is  but  another  name  for 
"wash"  sales.  One  broker  will  have  an  order  to  buy  one 
hundred  shares  or  more  at  a  certain  ]»rice  .-md  another 
bi'oker  an  order  to  sell  a  similar  amount  of  stock  at  the  same 
]irice,  each  older  emanating  from  the  same  source.  The  pub- 
lic, unaware  that  these  orders  arc  artificial,  accept  them  as 
actual  transactions. 

P)ut  this  .sort  of  dece])tion  is  now  largely  a  thing  of  the 
past  as  a  result  of  the  investigation  made  by  (iov.  Hughes' 
committee.  lAnother  ]u'actice,  now  forbidden,  is  the  one  by 
which  a  member  was  allowed  to  bid  for  or  offer  a  certain 
price  for  a  large  block  of  stock,  but  did  not  have  to  execute 
the  order  unless  exactl}^  the  amount  of  stock  his  order  called 


INVESTMENTS  AND  SPECULATION  183 

for  was  offered,  or  taken,  at  his  price.  This  practice  al- 
lowed a  member  to  bid  $160  for  a  block  of  10,000  shares, 
all  or  none,  when  the  price  was  only  $150,  very  well  know- 
ing beforehand  that  no  other  member  could  fill  his  order. 
Orders  like  this  were  mere  bluffs  made  ostentatiously  to 
impress  the  public.  Now  a  member,  whatever  he  makes  a 
bid,  must  take  stock  in  whatever  blocks  it  is  offered  and  this, 
of  course,  negatives  the  sort  of  manipulation  just  described 
and  which  is  designed  to  deceive  the  public. 

All  manipulation,  however,  does  not  spring  from  pool 
operations.  Some  of  it  is  caused  by  large  underwriting 
bankers  who  in  bringing  out  an  issue  of  new  securities  listed 
on  the  Stock  Exchange,  bring  about  an  advance  in  the  price 
of  the  already  outstanding  securities  in  order  to  create  a 
good  impression  for  their  prospective  financing  and  secure 
for  it  a  successful  reception  on  the  part  of  the  public,  which 
is  more  likely  to  be  keen  for  anything  indicating  a  likeli- 
hood of  a  quick  profit. 

On  the  floor  of  the  Stock  Exchange  are  arranged  rows 
of  posts,  around  each  of  which  gather  the  traders  who  trade 
in  a  certain  security.  To  facilitate  the  trading,  each  mem- 
ber selects  some  stock  of  wliieh  he  wishes  to  make  a  specialty 
and  makes  his  headquarters  while  on  the  floor  at  the  post 
allotted  to  his  security.  As  examples,  one  member  acts  as 
specialist  in  Reading  Railroad  stock,  another  in  Union 
Pacific  shares  and  so  on.  For  the  more  active  shares  there 
may  be  a  number  of  specialists.  They  execute  orders  in 
their  specialties  for  a  commission  of  $2  for  each  one  hun- 
dred shares  when  the  orders  are  fi'om  fellow  members.  In 
this  way  members  are  saved  a  good  deal  of  running  about 
on  the  floor  of  the  Exchange  and  also  considei'ablo  of  their 
time. 

But  the  specialists  in  the  more  inactive  shares  are  often 
subjected  to  severe  criticism.  They  are  in  a  position  to 
make  considerable  money  if  not  over-scrupulous.  They  are 
in  a  position  to  execute  an  order  of  their  own  before  that  of 


184  LOUIS  GUENTHER 

a  cnstomor.  For  cxam]»lo,  a  ciistomor  pvos  a  market  order 
to  sell  100  shares  of  an  inactive  stoek.  The  specialist  could, 
were  he  so  inclined,  l)reak  the  ])rice  three  or  four  points  and 
Ituv  in  the  stock  his  customer  sold.  To  the  next  Iniver  who 
came  alone:  he  could  sell  this  very  same  stock  at  an  advance 
of  two  or  tliree  points,  makinir  not  only  his  commission  fi'om 
both  seller  and  ])uyer  but  also  the  difference  in  i>i-ice.  I 
don't  say  that  this  is  done,  but  contend  it  can  be  done  and 
believe  that  amon^  the  much  needed  reforms  should  be  more 
stringent  supervision  over  the  sjDccialists  in  the  more  in- 
active securities. 

Some  of  the  Pitfalls  of  Speculation. 

I  cannot  attempt  to  elaborate  upon  the  many  different 
pitfalls  dug  by  crafty  schemers  to  catch  imwary  and  igno- 
rant speculators.  On  this  one  subject  alone  a  book  might 
be  written.  The  bucket-shops,  for  one,  have  proved  the 
principal  menace  to  the  public  but  fortunately  they  no 
longer  exist  to  the  great  extent  they  once  did,  n(»w  that  the 
Government  has  gone  after  them  with  a  big  stick.  A  l)ucket- 
shop,  as  already  described,  is  nothing  less  than  a  gambling 
room.  Bucket-shops  can  only  carry  on  a  prosperous  business 
by  misleading  their  patrons.  This  they  do  by  inducing 
them  to  take  on  stocks  likely  to  decline  or  sell  stocks  more 
liable  to  go  \i\). 

It  is  always  to  the  best  interest  and  protection  for  a 
person  who  wishes  to  deal  in  stocks  or  conuuodities  to  awry 
on  his  tiansactions  through  a  member  of  n  regular  exchange, 
as  such  transactions  thus  come  under  the  su])ervision  of 
the  members,  who  are  compelled  actually  to  execute  all 
their  orders.  For  a  member  to  be  caught  "bucketing"  or- 
ders means  his  expulsion  from  any  re])Utable  exchange. 
By  dealing  with  members  a  patron  is  also  dealing  with  a 
person  of  more  or  less  financial  responsibility  and  one 
whose  commission  is  sufficient  compensation  for  the  services 
he  performs.    Moreover,  it  is  possible  for  a  customer,  when 


INVESTMENTS  AND  SPECULATION  185 

transacting  his  business  throngli  a  mom])cr,  to  check  his 
orders  from  the  official  records. 

"Tips"  on  the  market  are  the  bane  of  speculators.  They 
prove  the  ruin  of  a  great  many.  A  speculator  will  hear  from 
some  one  about  whom  he  knows  nothing  and  with  whom  he 
has  scraped  up  a  passing  acquaintance  in  some  bi'okerage 
office,  that  such  and  such  a  stock  is  either  going  up  or  about 
to  have  a  big  break.  He  hurries  to  get  in  on  the  "good 
thing."  In  most  instances  such  tips  are  mere  guesses.  On 
such  flimsy  foundations  many  speculators  will  sometimes 
stake  a  small  fortune.  Ts  it  then  any  wonder  that  they  soon 
lose  all  their  money?  Other  speculators  will  pay  a  weekly 
or  monthly  stipend  to  some  advertising  tipsters  for  inside 
information.  The  inconsistency  of  such  ad^ace  is  plainly 
apparent  when  it  is  know^n  that  if  these  self -criers  of  their 
ability  to  forecast  prices  were  only  correct  about  a  small 
part  of  their  prognostications,  they  could  retire  in  a  short 
wiiile  with  great  big  fortunes. 

Yet  these  financial  charlatans  month  after  month  catch 
a  new  crop  of  suckers;  otherwise  they  could  not  continue 
in  the  game  as  long  as  they  do. 

It  is  a  remarkable  ]ihase  of  human  nature  that  prompts 
individuals  to  back  with  their  money  the  claims  of  perfect 
strangers,  but  when  it  comes  to  buying  even  only  a  pair  of 
socks  they  will  inspect  them  closely  to  be  sure  they  are  get- 
ting what  they  bargained  for.  Still  it  is  true,  for,  were 
this  not  a  fact,  no  such  schemes  like  the  520  per  cent  Frank- 
lin Syndicate  operated  by  a  clerk  by  the  name  of  ^filler  or 
the  Dean  SjTidicate  or  the  Storey  Cotton  S^nidicate  op- 
erated by  ex-convicts,  could  l)e  ]iossible.  These  were  all 
blind  pools,  so  to  speak.  They  advertised  that  speculation 
could  be  conducted  profitably  and  without  loss  and  would 
declare  out  of  their  supposed  operations  bic:  weekly  divi- 
dends. The  Franklin  S^-udicate,  while  it  lasted,  paid  10 
per  cent  weekly  dividends.  They  secured  some  person  in  a 
comnmnity  as  a  customer  and  it  would  not  be  long  before 


186  LOUIS  GUENTHER 

the  diipo  would  !)('  tcllinc:  all  his  noi.c:hV>ors  about  tho  fat 
dividonds  bo  was  roeoiviue^.  Tbo  result  would  bo  tbat  tbo 
eui)idity  of  otbors  was  arousod  and  tlioy  also  f<'ll  victims. 

Tboir  scbouios  woro  siniplo.  Tbo  dividonds  paid  oamo 
from  tbo  monoy  tboir  dupos  sent,  and  not  from  spooulation. 
In  tbo  oarly  sta^os  of  tbe  crooked  ,ii:amo,  tbo  dividonds  paid 
did  not  amount  to  verv  mueb  and  for  every  dollar  distrib- 
uted  in  tbis  way  tboy  woro  sure  of  ton  more  oomina'  back. 
Few  of  tboir  \irtinis  ever  ,u"ot  tbeir  money  back,  f(»r  tbey 
kept  sending  more  monoy  tban  tboy  rocoivod  so  as  to  in- 
crease tboii"  large  profits.  A  day  must  come  wben  sucb 
scbemes  as  tlieso  are  raided  or  tbeir  operators  d(^eide  to 
make  a  big  clean  up.  Tbon  all  tbeir  dupos  find  tbat  tbey 
have  not  been  speculating  but  bave  boon  swindled  out  of 
their  money. 

Luckily,  sucb  discretionary  pools,  as  tboy  are  styled, 
have  ceased  to  exist.  The  authorities  are  now  too  watch- 
ful. But  in  tboir  place  have  sprung  up  individuals  who  will 
handle  speculative  accounts  for  clients  for  a  share  of  tbe 
profits.  They  catch  their  full  measure  of  victims.  Those 
people  are  merely  gambling  with  tbeir  clients'  money.  If 
they  guess  rightly,  tbey  take  a  share  of  tbe  in-ofits;  if  not, 
their  customers,  not  tboy,  lose  monoy. 

Tn  tbo  fii'st  place,  no  person  should  speculate  who  has 
no  knowledge  of  securities.  One  nmst  not  forgot  that  in- 
trinsic value  and  ])ossil)le  increase  in  income  return  are  tbo 
moving  forces  behind  a  rise  in  tbe  price  of  a  security,  and 
conversely,  a  do})rociation  in  1lic  intrinsic  value  and  the 
likelihood  of  a  reduction  in  1lic  dividend,  are  behind  a  de- 
cline in  tho  pi'ico  of  a  security. 

Such  possibilities  can  l)o  detected  oidv  bv  close  studv  of 
prevailing  conditions  and  by  thorough  analysis  of  tho  earn- 
ings statement,  as  ]»ul)lisbed  by  corporati<ms. 

Tn  fact,  t<t  be  successful  in  speculation  a  ]iorson  must 
devote  as  close  study  to  conditions  as  bo  would  to  any  pro- 
fession ho  desires  to  master. 


INVESTMENTS  AND  SPECULATION  187 

Speculation  is  a  rich  man's  pastime,  not  a  poor  man's 
road  to  fortune.  Tlie  latter  has  no  business  in  it.  A  rich  man 
is  in  a  i)osition  to  recuperate  his  losses  by  patient  waitinrj. 
If  he  is  a  buyer,  he  can  take  his  securities  out  of  the  market, 
put  them  away  in  his  strong  box  and  bide  his  time  until  they 
not  only  recover  their  price  but  go  high  enough  so  that  there 
is  a  prolit  in  them  for  him.  If  he  is  seller,  he  can  close  his 
transaction,  sell  again  at  a  higher  level  until  the  decline  an- 
ticipating takes  place.  But  even  then  men  who  adopt  this 
method  are  not  always  right  in  their  conclusions. 

The  most  successful  speculators  are  the  actual  investors 
who  buy  their  securities  outright  after  a  severe  break  in 
prices  and  store  them  away  until  a  recovery  occurs  in  which 
they  can  resell  at  a  profit.  They  do  not  buy  more  than  they 
can  well  afford  to  buy  and  as  they  own  the  securities  out- 
right they  cannot  be  called  upon  for  margin. 


XXX.     THE  PROMOTER'S  PLACE  IX  FIXAXCE. 

He  ^vll<^  proves  himself  a  successful  and  capa])le  pro- 
moter is  a  very  useful  individual.  As  the  difficult  task  falls 
to  him  oL'  bringiuL!:  capital  and  oi)portunity  together  for 
their  nuitual  exploitation,  no  one  am  disi)ute  that  such 
men,  when  honest  in  their  efforts,  really  perform  a  vt  iv 
valuable  service  when  they  succeed  in  raising  aipital  to 
finance  legitimate  and  meritorious  enterprises. 

In  reality  they  are  the  men  who  tind  legitimate  oppor- 
tunities in  which  capital  may  be  i^roHtaldy  employed.  Born 
optimists  as  they  are,  they  are  never  at  a  loss  to  devise  meth- 
ods of  presenting  their  projects  in  a  form  sufficient  to  in- 
terest people  of  means. 

Todav,  manv  cities  and  towns  are  richer  in  either  new 
industries,  electric  light,  gas,  or  water  plants,  or  transpor- 
tation facilities,  because  of  the  efforts  of  some  promoter 
whose  confidence  that  such  ventures  would  prove  profitable, 
induced  him  to  devote  all  his  time  and  energies  to  raise  the 
required  capital  to  start  them.  Many  communities  owe  their 
railroad  facilities  to  the  same  tireless  ])oomers. 

But  not  all  promoters  are  ui)right  and  honest.  Some  are 
shifty  and  dishonest  and  are  in  tlie  l)usiness  to  plunder  in- 
vestois.  Honest  i)romoters  are  constructionists;  they  are 
the  men  who  do  things  in  an  honest  way,  never  undertaking 
any  ])ro})osition  unless  they  are  first  thoroughly  satisfied 
it  is  sound,  and  then  they  stick  to  it  until  it  is  a  success. 
The  crooked  pi-omoter  is  the  reverse;  he  is  an  individual 
who  is  not  only  indifferent  as  to  the  ultimate  outcome  of  a 
project,  but  mercenary,  since  he  has  but  one  pui])ose  al- 
ways in  mind,  which  is  to  use  his  schemes  to  unload  stocks 
or  bonds  on  investoi-s,  caring  little  whether  the  securities 
are  sound  or  not.    His  schemes  are  only  traj^s  to  catch  the 

188 


INVESTMENTS  AND  SPECULATION  189 

money  of  the  joiiblic,  and  are  not  newly  developed  oppor- 
tunities for  making  money.  It  is  unfortunate  that  this  type 
of  promoter  is  largely  in  the  majority.  Because  of  their 
pernicious  efforts  the  business  of  promoting  has  in  late 
years  come  into  bad  odor,  although  undeservedly,  as  it  is 
a  line  of  work  that  alw^ays  will  be  necessary.  Men  capable 
of  bringing  capital  and  enterprises  together  will  always  be 
required ;  their  services  cannot  very  well  be  dispensed  with. 

The  legitimate  promoter  has  no  brass  band  to  herald 
him;  he  works  very  quietly  and  unostentatioush^  He  is 
a  mole  who  keeps  burrowing  along  without  noise.  If  he 
is  planning  a  merger  of  a  number  of  industrial  concerns, 
to  bring  about  greater  degree  of  stability  for  a  certain  line 
of  manufacture,  he  usually  starts  by  obtaining  options  on 
the  plants  and  has  his  plans  and  statistics  showing  the  pos- 
sible profits  wtII  worked  out  before  he  is  ready  to  lay  them 
before  capitalists.  If  he  is  bent  upon  building  a  new  rail- 
road or  furnishing  a  community  with  some  very  much 
needed  public  service,  he  first  has  his  rights  of  way  or  fran- 
chises safely  tucked  in  his  pocket  before  undertaking  to 
raise  the  necessary  capital.  He  never  begins  half-way,  as 
he  realizes  the  futility  of  attempting  to  induce  large  capital- 
ists to  finance  his  projects  unless  he  is  in  a  position  to  fullill 
every  promise  he  makes. 

Furthermore,  a  promoter  w^ho  has  a  good  money-mak- 
ing opportunity  and  is  intelligent  enough  to  present  it  prop- 
erly, usually  experiences  no  difficulty  in  finding  capital  for 
it.  Capital  is  hunting  him  as  nuich  as  he  is  seeking  it.  The 
promoter,  however,  whom  the  i)ul)lic  must  watch  very  care- 
fully and  be  on  giiard  against,  is  the  man  who  has  a  half- 
baked  scheme  which  he  wishes  investors  to  finance  entirely 
and  take  all  the  chances,  liv  may  not  exactly  be  a  knave, 
but  simply  a  fool  who  imagines  he  has  a  good  thing  and  be- 
lieves he  can  raivse  enough  money  to  exploit  it  by  a  direct 
appeal  to  the  multitude  of  investors.  Whether  he  is  a  knave 
or  a  fool,  the  result  to  the  investor  in  the  end  is  equally 


190  LOUIS  GUENTHER 

disastrous,  if  enough  capital  is  not  raised.  All  those  then 
^vh()  have  hacked  the  promoter's  confident  promises  with 
their  capital,  lose  it  when  the  critical  period  is  reached,  when 
more  capital  is  required,  hut  can  no  longer  he  ol)tain(^d. 

Every  year  hundreds  ujoon  hundreds  of  such  ventures 
succunih,  for  from  their  inception  they  never  really  have 
a  chance  to  demonstrate  what  they  are  capahle  t>f  accom- 
jilishing,  merely  through  lack  of  sufficient  capital. 

The  intelligent  and  successful  promoter  guards  against 
such  a  contingency.  He  usually  deals  with  wealthy  capital- 
ists and  large  underwriting  l)ankers  who  are  prepared  to 
pledge  all  the  necessary  capital  to  insure  the  completion  of 
the  project  hefore  inviting  investors  to  participate.  They 
at  least  go  to  all  lengths  to  he  sure  of  their  ground.  It  was  in 
this  way  the  steel  merger,  copper  merger,  and  a  dozen 
other  well-known  mergers  were  organized  hy  shrewd  pro- 
moters. Their  securities  may  have  been  watered,  ])ut  at 
least  they  always  had  a  market. 

Criticism  may  properly  l)e  directed  at  this  watered  cap- 
ital, but  it  must  be  said  in  behalf  of  the  original  promoters 
that  the  holders  of  their  stocks  could  realize  something  on 
them  whenever  they  wanted  to  sell.  As  much  cannot  be 
claimed  for  the  stocks  of  tlie  number  of  shift v  schemes  ex- 
])loited  during  the  last  twenty  years,  by  means  of  flam- 
boyant and  extravagant  newspaper  advertising.  To  men- 
tion the  names  of  all  of  them  would  alone  require  a 
book  as  bulky  as  an  Encyclopedia  Britannica.  ^lost  of  the 
secui'ities  issued  l>v  tlieso  schemers  are  now  W(u-thless. 
AVhat  money  the  puljlic  invested  in  flicni  has  been  nm\- 
pletely  lost. 

Only  one  general  rule  can  be  suggested  by  which  an  in- 
vestor may  judge  the  standing  of  a  pr()m(>ter  who  is  en- 
deavoring to  enlist  ca])ital.  That  rule  is  to  find  what  is  the 
prcanoter's  reputation  in  the  financial  conununity— whether 
he  has  any  previous  successes  to  his  credit,  never  to  accept 
his  mere  statements  as  facts,  but  compel  him  to  furnish  a 


INVESTMENTS  AND  SPECULATION  191 

complete  financial  report  T\'ln('li  will  show  how  much  cap- 
ital his  project  will  require  and  then  what  assurances  he 
can  j^ive  that  he  will  be  able  to  raise  it  all. 

By  an  investigation  of  his  character  it  is  possible  to 
learn  whether  the  proposition  is  of  a  substantial  character, 
or  the  promoter  is  simply  trying  to  raise  a  large  amount  of 
capital  "on  a  shoe  string."  Other  than  this  there  are  no 
specific  rules.  There  are  so  many  different  ventures  con- 
stantly being  brought  out  and  such  a  great  variety  in  the 
plans  adopted  to  raise  capital,  that  each  proposition  must 
be  judged  individually  and  according  to  its  merits. 

Listed  and  Unlisted  Securities. 

"We  hear  considerable  pro  and  con  about  listed  securities. 
The  subject  is  very  much  discussed  not  only  wherever  secu- 
rity buyers  congregate,  but  frequently  in  the  financial  col- 
umns of  the  newspapers.  The  most  convincing  argument 
brought  forward  by  champions  of  listed  securities  is  that 
the  latter  have  a  market.  That  is  to  sav,  thev  can  be  sold 
when  it  comes  necessary  to  sell  them.  Their  point  is  that 
individuals,  when  they  make  an  investment,  wish  to  be  in 
a  i^osition  where  they  can  always  sell  what  they  buy.  Then 
they  also  contend  that  it  is  much  easier  to  obtain  loans  up- 
on securities  listed  on  some  Exchange.  But  fallacy  is  to 
be  found  in  all  their  arginnents. 

Standard  Oil  shares  are  not  listed  on  the  Stock  Ex- 
change. This  security  is  traded  in  on  the  open  market  and 
there  is  not  the  least  difficulty  experienced  in  quickly  find- 
ing a  buyer,  should  one  wish  to  sell  the  stock,  nor  will  a  per- 
son be  turned  out  of  doors  by  any  banker  if  he  wishes  to 
borrow  any  money,  as  there  is  no  more  desirable  collateral 
for  a  loan  than  the  shares  of  the  Standai-d  Oil  Co.  There 
are  any  number  of  other  desirable  stocks  in  a  similar  posi- 
tion, alth(High  they  are  not  listed.  A  few  which  might 
be  mentioned  are  Royal  P>aking  Powder,  Singer  Sewing 
^lachine,  American  T}q:>efounders,  Otis  Elevator,  Borden's 
Condensed  Milk,  and  so  on. 


192  LOUIS  GUENTHER 

lu  tlic  final  analysis,  it  is  not  wlicther  a  stock  is  listed 
or  not  which  gives  it  marketability,  but  its  intrinsic  merit 
as  an  investment.  This  is  what  the  buyers  of  stocks  first 
consider,  and  quite  properly.  Furthermore,  this  element  is 
[also  what  bankers  first  seek  t<»  determine  when  making 
loans  or  at  least  they  should  do  so.  if  a  corpoi-ation  is  doing 
a  lai\<;e  business,  has  i'^v  years  ])aid  ^ood  dividends  and  con- 
.tinues  to  pay  them,  then  it  should  not  be  difficult  to  sell  the 
stock  when  the  occasion  to  do  so  arises,  or  to  borrow  money 
'upon  it.  i 

|i?t  Listed  stocks  are  decidedly  at  a  disadvanta.a:e  with 
neiTous  security  holders,  for  anv  extreme  fluctuations  in 
their  prices  mi,i2:ht  prompt  them  on  the  spur  of  the  moment 
and  without  thinking,  to  sell  when  they  should  not,  or  buy 
when  they  ought  to  let  them  alone. 

There  are  also  many  securities  listed  on  the  Stock  Ex- 
change, which,  so  far  as  commanding  a  ready  market,  might 
as  well  never  have  been  there,  so  inactive  are  they.  Nor  is 
this  to  their  discredit.  It  may  be  a  case,  as  it  often  proves, 
that  the  shares  are  so  closelv  held  bv  investors  that  very 
little  stock  comes  into  the  market.  Tlic  position  of  the 
shares  of  the  Eastman  Kodak  Company  of  Rochester,  N, 
Y.,  is  an  example  of  this.  The  stock  has  ]iaid  sudi  a  good 
rate  of  dividends  for  years  that  those  wlio  (.wn  it  are  re- 
luctant t(t  part  with  it.  The  shai'es  of  the  express  com- 
panies, although  also  listed,  are  inactive  a  good  deal  of 
the  time  foi-  the  verv  same  reason.  There  are  some  listed 
stocks  in  which  sometimes  days  will  pass  without  as  much 
as  one  hundred  shares  changing  hands. 

I  mention  this  only  to  prove  that  all  the  advantages  arc 
not  always  with  listed  stocks.  There  are  a  great  many  equal- 
ly good  secui'ities  not  on  the  Exchange  which  it  would  be 
the  height  of  folly  for  investors  to  ignore  ])ecause  of  the 
absence  fi-om  the  listing  department. 

When  a  person  buys  a  security  he  is  promjited  to  do  so 
because  of  its  value  and  prospects.     That  is  the  cardinal 


INVESTMENTS  AND  SPECULATION  193 

principle  in  making  profitable  investments  and  no  one  will 
dispute  the  argument.  While  I  am  not  decrying  the  ad- 
vantages of  securities  that  are  listed,  I  at  least  cannot  see 
where  it  is  a  mistake  when  a  corporation  fails  to  place  its 
securities  on  the  Exchange. 

I  have  been  told  by  directors  of  corporations  that  they 
have  refrained  from  listing  their  stocks  because  of  a  fear 
that  if  they  did  so  the  stocks  would  be  in  danger  of  being 
manipulated,  where  as  it  is  their  desire  to  keep  the  stocks 
free  from  all  stock  juggling  and  have  them  sell  strictly  upon 
their  merits.  In  taking  this  view  they  are  quite  right,  for 
nothing  will  prejudice  a  security  in  the  opinion  of  the  public 
more  quickly  than  a  suspicion  that  the  fluctuations  in  its 
market  prices  are  artificial.  There  is  no  way  to  prevent 
this  being  done  on  the  Exchange  should  some  of  the  brokers 
conclude  they  could  make  a  good  profit  in  buying  quietly  a 
block  of  stock  and  then  by  a  display  of  strength  in  the  quo- 
tations, distribute  their  stock  on  a  scale  of  rising  prices. 
After  they  are  through  with  their  maneuvering,  the  stock 
might  decline  rapidly  in  price  to  the  great  impainnent  of 
its  market  position,  although  nothing  has  happened  to  de- 
preciate its  intrinsic  merits.  This  is  what  makes  some  cor- 
porations hesitate  to  list  their  securities. 

When  the  Governors  of  the  New  York  Stock  Exchanges 
devise  means  to  make  manipulation  extremely  difficult,  I 
am  inclined  to  think  the  hesitancy  shown  by  directors  of  the 
smaller  corporations  to  list  their  stocks  will  be  very  largelv 
removed.  Towards  this  end  the  suggestion  has  been  prof- 
fered to  prevent  brokers  from  buying  stocks  for  their  own 
account.  Whether  or  not  this  is  practicable  is  a  de])atable 
question. 

But  as  long  as  a  stock  has  intrinsic  merit  behind  it,  re- 
turns good  dividends  and  has  borne  a  good  reputation,  it 
is  immaterial  from  the  investor's  viewpoint  whether  it  is 
listed  or  not.  It  is  well  to  remember  that  that  which  has 
value  may  be  sold  and  money  borrowed  on  it. 

B.  VII— 13 


194  LOUIS  GUENTHER 

Mining,  Oil  and  Other  Bonds. 

Ever  so  often  it  seems  to  ])e  our  misfortune  to  run  into 
a  l)oom  of  some  kind  (»r  (•tlier  when  the  p(»i)nlar  fancy  for 
investments  turns  in  (me  jiarticular  direction  and  then  dis- 
cretion and  good  judgment  which  solx-r-minded  people  are 
supposed  to  exercise,  are  cast  aside  in  a  frenzy  to  gamble. 
If  it  is  not  in  mining,  then  it  is  for  the  exploitatit)n  of  a 
newly  discovered  oil  tiekl ;  if  it  is  not  for  that,  then  it  is  some- 
thing else  wliieh  has  taken  hold  of  the  public  fancy.  It  is 
during  such  Ijooms  that  the  flotation  of  new  securities 
reaches  its  flood  tide. 

A  great  many  j^eople  then  appear  to  be  obsessed  with 
but  a  single  idc^a,  to  acqiiire  wealth  overnight.  AVhen  pop- 
ular fancy  runs  wild  for  a  certain  class  of  securities,  it 
is  a  harvest  time  for  unscrupulous  manufacturers  of  se- 
curities. 

Yet  this  is  not  a  phenomenon  exclusively  characteristic 
with  us.  Nearlv  everv  other  nation  is  afilicted  more  or  less 
at  some  time  or  other,  with  the  same  sort  of  wild  speculative 
mania.  The  phlegmatic  Dutch  had  a  black  tulip  craze  when 
fabulous  sums  were  paid  for  this  ])ul1).  >^ ranee  was  turned 
into  a  nation  of  besottened  gamblers  by  John  T.aw  with 
his  fanciful  Mississip])i  bul)ble,  and  more  recently  by  De 
Lesseps  and  Ilirsch  with  their  more  ambitious  l*anama 
Canal  scheme.  AVe  are  inclined  to  look  u])on  the  French  as 
a  thiiftN'  r.icc,  vet  these  ineidents  prove  thev  can  be  aroused 
mider  ])eculiar  circumstances  to  throw  millions  away  ou 
baubles. 

In  Knghnid  such  debacles  result  frequently,  AVhile 
France  was  royally  entertaining  John  Law  and  pouring 
immense  riches  into  his  lap  to  squander,  Fnglishmen  were 
no  less  shorn  of  all  sober  sense  in  their  great  greed  to  get 
the  immense  wealth  which  the  South  Sea  trading  enter- 
prises, and  there  were  a  half-dozen  of  them,  promised  to 
bring.    With  the  same  rash  spirit  they  launched  upon  the 


INVESTMENTS  AND  SPECULATION  195 

^vil(lly  speciilativo  sclienies  converging  npon  the  dovolop- 
ment  of  the  new  gold  fields  of  Africa  and  only  recently 
something  approaching  a  frenzied  boom  in  rubber  company 
shares  developed  and  has  since  collapsed. 

There  was  a  boom  in  1849,  due  to  the  discovery  of  gold 
in  California,  but  our  first  extensive  boom,  which  is  remem- 
bered by  the  present  generation,  and  which  reached  any 
large  proportions,  was  the  speculation  in  oil,  when  the  first 
large  oil  area  in  this  country  was  discovered  in  Pennsyl- 
vania. People  from  all  over  flocked  to  the  oil  district. 
The  early  comers  made  money.  Their  successes  lured  oth- 
ers. In  this  way  the  fever  spread  until  it  ran  wild  until  it 
died  from  exhaustion. 

The  pioneers  are  the  ones  who  usually  make  the  money 
in  a  boom.  They  are  able  to  do  this  through  the  willingness 
of  those  who  follow  to  jDay  fancy  prices  for  their  holdings. 
They,  in  turn,  hand  them  over  to  other  late  comers.  The 
bubble,  once  started,  continues  to  expand  as  long  as  there 
are  people  who  will  take  what  others  have  to  offer  at  a  good 
profit,  which  in  ])()()ni  times  attains  fanciful  pro]')ortions. 
But  finally  there  comes  a  pause  when  every  one  rushes  to 
sell  in  an  anxiety  to  cash  in  their  paper  profits,  but  buyers 
are  scarce.  Then  the  bottom  drops  out  of  the  boom,  the  bub- 
ble bursts  and  property  or  investments  which  only  a  short 
while  before  were  figured  in  dollars,  are  not  worth  cents. 
Such,  in  brief,  is  the  history  of  booms. 

The  author  distinctly  remembers  the  Texas  oil  boom, 
which  it  was  his  good  fortune  to  observe  at  close  range  from 
its  inception  to  its  collapse.  A  week  after  oil  was  discovered 
the  rush  began  to  the  new  field.  Beaumont,  Texas,  which 
was  the  center  of  the  new  field,  grew  from  a  small  lumber 
town  of  not  more  than  (),000  po})ulation  to  a  bustling  city  of 
25,000  peo])le,  all  this  ])ottoin('d  on  a  fi"(^nzicd  hunt  for 
wealth.  The  Lucas  Gusher  brought  this  lioi-dc  of  ];)co])]('. 
It  was  spouting  oil  at  the  rate  of  70,000  barrels  a  day.  Tliis 
excited  the  imagination  of  the  masses. 


196  LOUIS  GUi^NTHER 

Nothing  was  more  easy  to  estimate  than  that  such  a 
production  meant  enormous  wealth.  At  fifty  cents  a  barrel 
the  new  well  was  showing  a  production  of  $35,000  daily 
which  was  all  right  on  paper.  If  one  well  could  show  this, 
then  the  profits  on  a  half-dozen  would  reach  enormous  pro- 
portions. Oil  land  which  could  be  bought  a  month  before  for 
only  a  few  dollars  an  acre,  jumped  by  leaps  and  bounds  in 
price  and  in  a  few  months  was  changing  hands  on  the  basis 
of  $1,000,000  and  over  an  acre.  Derricks  were  built  so  close 
together  that  it  was  impossible,  in  some  places,  to  walk  be- 
tween them. 

The  outcome  was  the  great  over-production  of  oil,  for 
which  there  was  no  market.  Oil  was  soon  begging  for  ])uy- 
ers.  The  price  declined  until  not  more  than  three  cents  a 
barrel  was  obtainable.  But  this  was  not  the  only  mishap  to 
befall  the  field.  The  large  number  of  wells  drilled  on  the 
same  spot  almost  exhausted  the  field  in  a  year's  time.  More 
than  a  thousand  different  oil  companies  were  promoted,  all 
with  varying  capital,  fi-om  a  modest  $50,000  to  several  mil- 
lion dollars.  The  public  invested,  it  is  conservatively  esti- 
mated, nearly  $100,000,000  in  actual  cash,  most  of  whieh  has 
been  lost,  as  there  are  today  only  a  few  oil  companies  com- 
pared to  the  number  formerly  in  this  field,  and  they  are 
largely  o^^^led  by  three  or  four  large  corporations. 

It  is  the  same  with  mining.  The  Cripple  Creek,  Gold- 
field,  Tonapah  and  Cobalt  booms  sucked  up  one  hundred 
dollars,  the  money  of  misguided  investors,  where  it  returned 
one  dollar  in  dividends.  Porcupine,  the  new  gold  camp  in 
Canada,  is  likely  to  repeat  history.  It  is  not  that  these 
camps  lack  opportunities  for  successful  ex]-)loitation ;  it  is 
due  to  the  public  rushing  heedlessly  into  these  things  and 
taking  anything  offered  T\ithout  investigation,  snapping 
at  them  like  a  school  of  hungry  fish  at  the  bait  thrown  out. 

This  is  what  happened  also  in  the  great  industrial  boom 
following  ^IcKinley's  inauguration  as  President  in  1897.  In 
those  days  it  seemed  that  all  promoters  had  to  do  to  induce 


INVESTMENTS  AND  SPECULATION  197 

the  public  to  pour  its  money  in  upon  them  was  to  incorpor- 
ate a  company,  plan  the  manufacture  of  something  and  ar- 
range in  their  prospectuses  a  mass  of  statistics  demonstrat- 
ing how  much  money  could  be  made.  It  is  needless  to  say 
where  things  are  done  thus  loosely  that  the  majority  of  the 
enterprises  never  can  reach  beyond  the  embryonic  stock-sell- 
ing stage. 


XXXI.    THE  GET-RICII-QUICK  LURE. 

Uutil  recent  years,  the  Get-Rich-Quick  Game  had  at- 
tracted little  attention,  althon.uh  it  had  heen  an  evil  in  the 
domain  of  finance  which  had  slowly  but  steadily  grown  for 
years  until  it  had  reached  proj^ortions  where  it  had  actually 
become  a  serious  menace  to  our  national  prosperity.  But  it 
could  no  longer  be  ignored.  It  spread  so  far  that  the  neces- 
sity was  forced  on  the  different  states  and  even  on  our 
National  Government  to  devise  rigid  restrictions  to  check 
the  invasion  u]^on  our  people  made  by  the  multitude  of  such 
schemes  which  have  been  continuously  cropping  up. 

The  Get-Rich-Quick  Game,  as  conducted  in  this  country, 
is  no  longer  a  small  factor.  President  Taft  regarded  all 
such  schemes  as  constituting  a  danger  to  our  prosperity, 
serious  enough  to  make  it  ineuni])ent  on  him  t<»  devote  a 
pai-agra])h  in  one  of  his  recent  messages  recommending  that 
drastic  action  be  taken  against  these  swindles. 

The  losses  the  public  sustains  through  get-rich-quick 
schemes  is  enormous.  But  the  greatest  harm  following  does 
not  come  to  intelligent  people,  as  they  are  not  so  easily  de- 
luded; l)y  far  the  larger  number  of  victims  is  drawn  from 
the  huni))ler  classes,  the  thrifty  accumulators  of  capital, 
who,  being  totally  ignorant  of  the  first  sound  principles  gov- 
erning investments,  and  still  anxious  to  make  their  money 
yield  the  largest  income,  grasp  eagerly  at  different  proposi- 
tions bi-ought  to  their  attention  beciiusc  they  promise  enor- 
mous returns. 

The  amomit  which  credulous  investors  lose  each  year  in 
our  many  different  Wallingford  schemes  to  acquire  wealth 
overnight  and  on  a  few  hundred  dollars,  cannot  be  estimated 
accurately.  Still,  I  believe  I  am  not  exaggerating,  but  un- 
derestimating the  total  loss,  when  I  place  the  amount  be- 

198 


INVESTMENTS  AND  SPECULATION  199 

twecn  $150,000,000  and  $200,000,000  every  year.  This  cer- 
tainly is  a  liiig-c  amount  of  capital  to  throw  a"SYay  upon  ven- 
tures which  never  have  had  a  ghost  of  a  chance  to  succeed 
from  their  veiy  inception,  because  they  were  conceived  at 
the  start  in  the  womb  of  dishonest  v. 

I  \\'as  asked  some  months  ago  by  ]\Ir.  C.  ^I.  Keys,  the 
financial  editor  of  World's  Work  Magazine,  to  prepare  some 
statistics  of  the  more  prominent  get-rich-quick  fakes  foisted 
on  American  mone}^  savers  during  the  last  few  years.  In 
the  preparation  of  these  statistics  I  went  no  further  l^ack 
than  seven  vears  and  included  onlv  such  schemes  which 
emanated  principally  from  the  eastern  financial  centers. 

The  statistics  I  furnished  World's  Work  included  forty- 
two  oil  comiDanies,  with  an  aggregate  cai)italization  of  $83,- 
448,128;  one  hundred  nineteen  mining  companies  with  an 
aggregate  capitalization  of  $527,882,500;  and  eighty-two 
companies  of  a  miscellaneous  character,  with  an  aggregate 
capitalization  of  $448,269,780.  This  list  was  only  a  partial 
one  and  included  only  such  schemes  still  fresh  in  the  pub- 
lic's mind.  Where  one  was  mentioned  there  were  two  score 
or  more  unnamed,  because  space  to  include  them  was  not 
availa])le. 

Yet  here  in  this  incomplete  list  we  see  a  total  capital  in 
excess  of  one  billion  dollars,  of  which  but  an  infinitesimal 
part  actually  went  into  the  development  of  these  enter- 
prises: th(^  larger  part  drifted  to  the  pockets  of  dishonest 
promoters,  went  for  flamboyant  advertising  in  the  not  over- 
scrupulous newspapers,  or  was  squandercul  on  large  com- 
missions to  stix'k  salesmen  and  their  sub-agents.  All  the 
millions  investors  threw  in  these  schemes  proved  a  total 
loss.  A  country  eannot  long  continue  to  prosper  which  will 
tolerate  the  snuffing  out  of  so  much  of  its  available  capital 
each  year. 

The  Get-Rich-Quick  Oame  is  a  convenient  blind  for  the 
high-class  confidence  man  to  hide  behind.  Until  the  authori- 
ties,  following  the  lead  of  the   National   Government,  be- 


200  LOUIS  GUENTHER 

came  aggressive  and  made  up  their  miiuls  that  it  was  high 
time  to  stop  this  form  of  brazen  phmder,  crooks  and  crafty 
promoters  found  the  occupation  of  despoiling  the  masses 
from  such  vantage  points  as  fiscal  agents,  fake  bankers  and 
brokers  extremely  congenial,  nor  were  the  risks  they  as- 
sumed great.  Compared  to  them,  hold-up  men  were  indi- 
viduals of  some  couraije,  for  thev  at  least  alwavs  invited 
danger  from  a  counter-attack  when  they  assaulted  wayfar- 
ers to  get  theii-  booty.  The  get-rich-quick  shark  was  seldom 
in  danger  from  physical  violence,  for  if  one  of  his  victims 
came  to  seek  him  out  in  his  office  to  force  hmi  to  return  his 
plunder  by  physical  persuasion,  he  was  never  to  be  found 
around. 

The  get-rich-quick  schemer  works  along  clever  lines.  He 
acquires  mining  claims  or  a  lease  on  some  oil  property  some- 
where near  where  a  real  boom  is  on  and  at  once  starts  a 
company,  capitalizing  it  for  a  large  amount,  or  he  may  get 
hold  of  some  new  invention,  like  the  wireless  telegraph,  or 
the  wireless  telephone,  and  subject  them  to  the  same  process 
of  inflation.  This  preliminary  step  taken,  he  next  proceeds 
to  have  stock  certificates  and  attractive  literature  printed, 
promising  profits  ranging  from  two  hundred  to  as  many 
thousand  per  cent.  Then  he  is  ready  for  his  work  of  pluck- 
ing investors  of  all  the  money  they  can  spare. 

One  of  their  effective  schemes  is  to  offer  their  stock  at 
a  low  price,  much  under  its  par  value.  They  fix  on  a  low 
price  the  better  to  convince  their  dupes  with  their  plausible 
argiunents  that  the  investment  will  rapidly  advance  in  value. 
In  many  instances,  they  hold  forth  promis(\^  that  their  stock 
will  reach  a  jirice  far  in  excess  of  its  par  value  as  soon  a3 
their  enterprise  begins  to  pay  large  dividends,  which  are 
never  declared  unless  fake  payments  are  made  and  then 
they  are  used  merely  as  a  bait  to  be  withdra^^Tl  later  on. 

The  difference  in  the  price  at  which  a  victim  may  buy 
stock  and  what  it  is  sure  to  reach,  according  to  the  promoter, 
is  represented  to  him  as  the  profits  he  can  easily  make.    The 


INVESTMENTS  AND  SPECULATION  201 

profit  is  so  vastly  in  excess  of  what  it  is  possible  for  con- 
servative investments  to  return  that  the  lure  catches  igno- 
rant and  greedy  investors,  but  not  intelligent  people,  who 
will  investigate  thoroughly  before  biting  on  the  mere  prom- 
ises made  by  people  entirely  unknown  to  them. 

Another  scheme  adopted  by  get-rich-quick  operators  is 
to  announce  an  advance  in  the  price  of  the  stock  and  urge 
that  it  be  bought  for  the  profit  which  can  be  made  from  the 
increase  in  its  market  value :  this  is  what  thev  all  sav.  If 
a  stock  is  offered  for  ten  cents  a  share  and  will  be  advanced 
to  20  cents  a  share,  it  is  pointed  out  that  the  investor  will 
make  100  per  cent.  This  snare  catches  a  great  many  vic- 
tims. The  stock  has  not  advanced  one  mill  in  value ;  all  that 
has  taken  place  is  that  it  has  been  arbitrarily  marked  up  in 
price.  If  any  effort  to  sell  the  stock  w^re  made  by  an  invest- 
or, he  would  find  out  that,  virtually,  there  was  no  genuine 
market  for  its  sale. 

All  sorts  of  efforts  are  made  to  secure  the  consent  of 
men  having  some  reputation  to  act  as  directors  for  get-rich- 
quick  schemes;  some  are  innocently  drawn  into  the  game 
through  an  honest  belief  that  it  is  a  good  thing  and  certain 
of  success ;  others,  again,  act  for  a  more  mercenary  purpose, 
giving  their  services  in  return  for  a  salar}"  or  a  big  block  of 
stock  which  they  expect  to  sell  at  a  profit. 

There  is  a  telegraph  company  whose  stock  is  widely  ex- 
ploited by  a  concern  in  the  East,  which  borders  as  near  to  a 
disreputable  promotion  as  it  is  possible  to  get  without  its 
authors  breaking  into  the  ])enitentiary,  for  which  a  number 
of  very  well-kno\^Ti  public  men  are  acting  as  an  advisory 
board  and  among  whom  is  a  famous  divine.  Yet  not  one  of 
these  men  ever  attended  a  meeting  of  the  company.  They 
have  consented  to  act  as  an  advisory  committee  upon  the 
plea  of  others  that  their  presence  will  be  a  guarantee  that 
the  enterprise  will  be  free  from  stock  jobbery.  The  general 
reputation  of  these  men  is  proof  of  their  integrity ;  they  are 
the  innocent  cat's-paws  of  crafty  promoters  behind  the 


202  LOUIS  GUENTHER 

scheme,  who  use  their  names  and  high  character  to  inveigle 
the  public  into  buying  the  stock.  This  is  by  no  means  an 
isolated  case.  There  are  anv  num])er  of  simihir  illustrations 
which  could  be  given.  Get-rich-quick  promoters  are  fully 
aware  of  the  power  the  names  of  reputal)l('  men  have  upon 
the  purse  strings  of  credulous  investors  and  they  cmi)loy 
every  means  to  secure  such  men  as  directors  in  their  enter- 
prises. 

Sometimes  it  occurs  that  men  in  good  repute  will  l)elieve 
they  have  a  good  thing.  Likely  they  have,  but  unfortunately 
they  fall  among  the  crooks  in  linance  who  enamor  them 
with  promises  of  quickly  raising  all  the  capital  to  develop 
their  enterprises  and  ruin  them  in  a  short  while  by  their 
dishonest  operations.  This  often  happens.  I  remember  a 
legitimate  industrial  enterprise  which  fell  among  the  tinan- 
cial  Philistines  who  robbed  it  from  all  sides  and  tinally 
forced  it  into  bankruptcy.  After  that  experience  it  was  im- 
possible to  raise  any  money  for  it. 

If  a  fake  advance  in  the  price  of  a  stock  fails  to  entrap 
victims,  then  fraudulent  dividends  are  tried.  The  backers 
of  get-rich-quick  schemes  are  never  at  a  h^ss  to  spring  any 
cou]i  if  it  will  suffice  to  bi-iug  them  money.  They  will  guar- 
antee to  buy  stock  back  within  a  eci'lain  time  at  a  liigher 
price,  if  that  will  catch  a  sucker,  with  ik*  intention  of  living 
U])  to  theii-  ])romises,  and  as  they  are  hnancially  irrespon- 
sible it  is  useless  to  start  any  legal  action  against  them,  as 
no  monev  could  be  recovered  after  once  thev  obtain  a 
strangle  hold  uj)on  it. 

A  few  years  ago  some  get-rich-quick  mining  promoters 
devised,  so  they  claimed,  a  i)lan  for  a  guaranty  against  loss. 
The  scheme  consisted  of  a  trust  fund  inti»  which  were  de- 
posited a  certain  number  of  shares  in  each  of  the  companies 
they  ])rom(tte(l.  It  was  a  sort  of  grab  box.  If  the  investor 
was  dissatisMed  with  one  stock  he  had  ])urchase(l  beciiuse  it 
did  not  \n\y  dividends  or  advance  in  price  (juickly  enough, 
he  could  turn  his  stock  into  this  depository  and  take  out 


INVESTMENTS  AND  SPECULATION  203 

some  other  stock  which  he  fancied  the  more.  As  all  the 
stocks  were  equally  worthless  there  was  no  protection 
against  loss.  Still  it  was  a  good  argument  and  had  a  good 
effect  while  the  scheme  still  had  the  flavor  of  novelty. 

When  this  plan  wore  out  its  welcome,  fake  bonding  com- 
panies were  started.  These  companies  guaranteed  to  repay 
the  investor  in  twenty  years,  some  in  ten  years,  all  the  money 
they  had  paid  for  a  stock,  if  in  the  meanwhile  it  did  not 
prove  profitable,  but  a  failure.  This  also  sounded  convinc- 
ing but  none  of  these  bonding  companies  was  ever  solvent 
or  could  ever  live  up  to  its  guarantee.  After  the  authorities 
closed  u\)  a  number  for  operating  an  illegal  business,  all  the 
others  disappeared  quickly. 

As  already  i-elated  in  previous  sections,  the  Government 
has  been  carrying  on  a  vigorous  campaign  to  rid  the  coun- 
try of  fraudulent  financial  schemes,  including  the  innumer- 
able get-rich-quick  ventures.  The  Government  is  in  the 
best  position  to  carry  on  this  work  very  effectively.  Such 
schemes  cannot  succeed  unless  they  are  allowed  the  free 
use  of  the  mails,  as  it  is  by  means  of  the  mails  the  promoters 
try  to  reach  investors  and  to  catch  them  in  their  claws.  By 
branding  them  as  frauds  and  denying  them  the  use  of  the 
mails,  these  fakers  cannot  very  well  succeed. 

Still  this  is  a  slow  process  of  extermination,  as  it  requires 
an  investigation  in  each  case,  sometimes  extending  over 
months  before  any  retaliatory  action  can  be  taken,  in  the 
meanwhile  considerable  mischief  can  be  done,  for  the  get- 
rich-quick  schemer  is  a  shifty  individual.  He  does  not  be- 
lieve in  procrastination ;  he  fully  appreciates  that  it  cannot 
be  long  before  his  ventures  must  attract  unfavorable  notice 
and  therefore  he  wishes  to  gather  in  his  loot  before  he  is 
smoked  out.  Nor  does  he  stay  long  with  any  one  scheme,  but 
transfers  his  activities  noiselessly  and  rapidly  from  one  to 
another.  Often  the  same  crooked  individual,  before  he  lands 
behind  the  bars,  has  foisted  on  his  dupes  a  dozen  or  more 
get-rich-quick  ventures.    One  of  them  promoted  as  many  as 


204  LOUIS  GUENTHER 

forty-six  compauies  before  the  Government  caught  him, 
each  one  of  which  was  an  out  and  out  fraud. 

In  the  get-rich-quick  business,  "the  sucker  list"  plays 
a  very  important  part.  This  list  is  made  up  of  names  of 
people  who  are  knowii  to  bite  at  worthless  truck.  Such 
people  are  the  "suckers.*"  These  "sucker"  lists  are  graded. 
In  one  raid  by  the  Government  of  the  offices  of  one  get-rich- 
quick  concern,  there  was  found  a  card  index  list  of  "suck- 
ers'* marked  according  to  their  measures  of  credulity 
*^good,"  "fair"  and  ^'worth  trying." 

Once  a  person  writes  for  literature  to  any  one  of  these 
harpies  he  is  for  years  afterwards  tagged  as  a  "sucker." 
From  then  on  he  will  be  bombarded  with  all  kinds  of  liter- 
ature from  all  the  get-rich-quick  sharks,  eveiyone  of  whom 
is  exceedinglv  anxious  to  make  him  wTalthv  without  anv 
effort  on  his  part.  His  name  is  peddled  from  one  to  another. 
His  name  is  bandied  about  or  sold,  as  a  large  business  is 
done  among  promoters  with  "sucker"  lists,  a  name  bringing 
all  the  way  from  one  cent  to  one  dollar,  according  to  its  pos- 
sible value  as  a  source  of  good  plucking. 

Hundreds  of  people  are  impoverished  every  year  by  get- 
rich-quick  schemes.  It  is  surprising  to  what  extent  a  mania 
for  w^orthless  stocks  siezes  on  some  classes.  I  remember  an 
instance  where  a  western  court  was  compelled  to  appoint  a 
guardian  for  one  man  in  order  to  keep  intact  the  remainder 
of  his  fortune,  which  at  one  time  was  quite  large,  and  save 
it  from  being  entirely  squandered  on  get-rich-quick  stocks. 
This  deluded  individual  had  bought  liberally  of  stocks  in 
every  fake  to  which  his  attention  was  called  until  he  had 
thi-owni  awav  nearlv  $:100.000.  "When  he  was  asked  whv  he 
did  it,  he  said  he  felt  that  among  the  many  stocks  he  had 
bought  a  number  would  prove  very  successful,  so  nuich  so, 
that  they  would  more  than  double  what  losses  he  had  sus- 
tained in  the  worthless  investments. 

This  is  a  theory  obsessing  a  great  many  persons.  They 
proceed  on  the  belief  that  if  one  out  of  twenty  stocks  even 


INVESTMENTS  AND  SPECULATION  205 

partially  realizes  the  profits  claimed  for  all,  they  will  be 
so  rich  thev  can  afford  to  lose  on  the  other  nineteen.  The 
twentieth,  the  good  thing,  somehow  never  comes  up  to  their 
measure. 

It  has  been  suggested  that  an  effective  curb  could  be 
placed  upon  this  evil  by  the  Government,  compelling  every 
enterprise  offering  its  stock  to  the  public  to  take  out  a 
national  charter  providing  as  its  principal  requirement  the 
filing  under  oath  with  the  Secretary  of  the  Treasury  of  a 
complete  statement  of  its  financial  condition,  which  state- 
ment would  be  open  to  public  inspection  or  a  copy  could  be 
obtained  by  an  investor  for  a  nominal  sum.  It  is  claimed, 
and  not  without  reason,  that  such  publicity  would  very 
quickly  develop  any  fraud  if  it  existed  and  enable  the  Gov- 
ernment to  stop  any  further  stock  sale  until  an  investiga- 
tion disproved  the  charges. 

The  idea  is  a  very  good  one.  Tt  would  be  even  more 
effective  were  all  the  directors  forced  to  acknowledge  under 
oath  the  genuineness  of  the  financial  statement  filed  and  if 
it  were  further  provided  that  any  perjury  or  false  swearing 
was  punishable  with  a  jail  sentence,  instead  of  a  fine.  Then 
it  is  likely  individuals  who  valued  their  good  names  would 
use  the  proper  precautions  not  to  carelessly  connect  their 
names  with  any  fraudulent  promotion. 

Still  no  investor  is  in  danger  of  falling  a  prey  to  a  dis- 
honest or  visionary  promotion  if  common  sense  is  exercised. 
By  inquiring  into  the  character  of  the  people  promoting  the 
venture  and  by  getting  a  financial  statement,  they  will  in  a 
large  measure  protect  themselves.  Even  should  they  not 
feel  themselves  competent  to  judge,  which  in  itself  suggests 
they  ought  to  be  doubly  careful  of  what  they  take  hold  of. 
then  they  should  consult  some  reputable  newspaper  or  bank- 
er. These  latter  would  only  too  willingly  advise  them  sin- 
cerely of  their  danger,  if  any  existed.  Ignorance  alone  is 
responsible  for  two-thirds  of  the  money  losses  in  invest- 
ments. Ignorance  cauont  be  protected  unless  it  alone  seeks 
tlie  protection. 


FOREWORD. 

*' People  will  endeavor  to  forecast  the  future  and  make 
agreements  according  to  their  prophecy.  Speculation  of 
this  kind  by  competent  men  is  the  self-adjustment  of  society 
to  the  probal)le." — Judge  Holmes  in  a  U.  S.  Supreme  Court 
Decision. 

*' A  study  of  past  disturbances  leads  to  the  conviction  that 
no  severe  depression  has  occurred  which  was  not  preceded 
by  loud  warnings.  These  warnings  ought  not  to  pass  un- 
heeded and  in  order  to  recognize  them  promptly,  it  is  neces- 
sary that  accurate  statistics  be  furnished.  Much  improve- 
ment has  been  accomplished  in  the  last  few  years,  though 
it  is  to  be  regretted  that  so  much  of  our  statistical  informa- 
tion is  fragmentary  or  inaccurate.  Official  and  private  pub- 
lications  furnish   much   valuable    information 

Other  statistics,  which  are  inadequate  or  lacking  and  which 
would  be  of  great  value,  are  those  pertaining  to  the  em- 
ployment of  labor,  capital  invested  i]i  new  enterprises, 
amounts  expended  in  new  construction,  volume  of  produc- 
tion in  the  various  kinds  of  manufactures,  and  statistics  of 
state  banks  and  savings  institutions  similar  to  those  per- 
taining to  national  banks.  After  making  due  allowance 
for  the  insufficiency  of  statistics,  it  nuist  be  said  that  the 
failure  to  pay  sufficient  attention  to  those  already  avail- 
able is  equally  to  be  regretted." — Senator  Theodore  E. 
Burton. 


208 


PART  II. 
GENERAL  PRINCIPLES  OF  INVESTMENT. 

BY  GEORGE  GARR  HENRY. 

[Of    Salomon    &    Compaii}-,     Bankers,    New     York;    Former    Vice-President, 
Guaranty  Trust  Company,  New  York.] 

With  tlk'  iiiuneiise  increase  in  wealth  in  the  United 
States  during  the  last  decade  and  its  more  general  distri- 
bution, the  problem  of  investment  has  assumed  correspond- 
ingly greater  importance.  As  long  as  the  average  business 
man  was  an  habitual  borrower  of  money  and  possessed  no 
private  fortune  outside  of  his  interest  in  his  business,  he 
was  not  greatly  concerned  with  investment  problems.  The 
surplus  wealth  of  the  country  for  a  long  time  was  in  the 
hands  of  financial  institutions  and  a  few  wealthy  capitalists. 
These  men,  the  officers  and  directors  of  banks,  savings- 
banks,  and  insurance  companies,  and  the  possessors  of 
hereditary  wealth,  were  thoroughly  equipped  by  training 
and  experience  for  the  solving  of  investment  problems  and 
needed  no  help  in  the  disposition  of  the  funds  under  their 
control.  During  the  last  ten  years,  however,  these  condi- 
tions have  been  greatly  altered.  The  number  of  business 
men  today  in  possession  of  funds  in  excess  of  their  private 
wants  and  business  requirements  is  far  greater  than  it  was 
ten  years  ago,  and  is  constantly  increasing.  These  men  are 
confronted  with  a  real  investment  problem. 

While  they  have  not  always  recognized  it,  the  pro])lem 
which  they  are  called  upon  to  solve  is  really  twofold— it 
concerns  the  safeguarding  of  their  i)rivate  fortune  and  the 
wise  disposition  of  their  business  surplus.  They  have  us- 
ually seen  the  first  part  of  this  problem,  but  mA.  all  have 
succeeded  in  clearly  understanding  the  second.  When  the 
treatment  of  a  man's  business  surplus  is  spoken  of  as  an 
investment  problem,  it  is  meant,  of  course,  not  his  work- 
ing capital,  which  should  be  kept  in  liquid  fonn  for  im- 

207 


208  GEORGE  GARR  HENRY 

mediate  needs,  but  that  portion  of  his  surplus  which  is  set 
aside  for  emergencies.  It  is  coming  to  be  a  recognized  prin- 
ciple that  every  business  enterprise  of  whatever  kind  or 
size  should  establish  a  reserve  fund.  It  is  felt  that  the  pos- 
session of  a  reserve  fund  puts  the  Ijusiness  upon  a  secure 
foundation,  adds  to  its  linancial  strength  and  reputation, 
and  greatly  increases  its  credit  and  borrowing  capacity. 
The  recognition  of  this  fact,  combined  with  the  ability  to 
set  aside  a  resei-vo  fund,  has  lu-ought  many  men  to  a  con- 
sideration of  the  best  way  in  which  to  dispose  of  it.  It  is 
obviously  a  waste  of  income  to  have  the  surplus  in  bank- 
accounts  ;  more  than  that,  there  would  be  a  constant  tempta- 
tion to  use  it  and  to  confuse  it  with  working  capital.  Its 
best  disposition  is  plainly  in  some  safe  interest-bearing  se- 
curity, which  can  be  readily  sold. 

Confronted  with  the  double  problem  thus  outlined,  what 
measure  of  success  has  attended  the  average  business  man 
in  its  solution? 

It  is  safe  to  say  that  the  average  man  has  found  it  easier 
to  make  mone}^  than  to  take  care  of  it.  Money-making,  for 
him,  is  the  result  of  successful  activity  in  his  o\m  line  of 
business,  with  which  he  is  thoroughly  familiar,  while  the 
investment  of  money  is  a  thing  apart  from  his  l)usiness, 
with  which  he  is  not  familiar,  and  of  which  he  may  have  had 
little  practical  experience.  His  failure  to  invest  money 
wisely  is  not  due  to  any  want  of  intelligence  or  of  proper 
care  and  foresight  on  his  part,  as  he  sometimes  seems  to  be- 
lieve, but  simply  because  he  is  ignorant  of  the  principles  of 
a  business  which  differs  radically  from  his  own. 

The  investment  of  monev  is  a  banker's  business.  When 
the  average  man  has  funds  to  invest,  whether  he  be  a  busi- 
ness man  or  a  pure  investor,  he  should  consult  some  ex- 
perienced and  reliable  investment  banker  just  as  he  would 
consult  a  doctor  or  a  la"\v}'er  if  he  were  in  need  of  medical 
or  legal  advice.  This  book  is  not  intended  to  take  the  place 
of  consultation  with  a  banker,  but  to  supplement  it. 


GENERAL  PRINCIPLES  OF  INVESTMENT     209 

The  advantage  of  such  consultation  is  showTi  by  the  fact 
that  if  a  man  attempts  to  rely  on  his  own  judgment,  he  is 
almost  certain  not  to  do  the  best  thing,  even  if  his  business 
instinct  leads  him  to  avoid  those  enterprises  which  arc 
more  plainly  unpromising  or  fraudulent.  It  should  be  re- 
mc^nbered,  however,  that  widows  and  orphans  are  not  the 
onlv  ones  ensnared  by  attractive  advertisements  and  the 
promise  of  brilliant  returns.  In  most  cases,  widows'  and 
orphans'  funds  are  protected  by  conscientious  and  conserva- 
tive trustees,  and  it  is  the  average  business  man  who  fur- 
nishes the  money  wiiicli  is  ultimately  lost  in  all  propositions 
which  violate  the  fundamental  laws  of  investment. 

The  average  man  is  led  into  these  unwise  investments 
through  a  very  natural  error  of  judgment.  Accustomed  to 
take  reasonable  chances  and  to  make  large  returns  in  his 
own  business,  he  fails  to  detect  anything  fundamentally 
wrong  in  a  proposition  sim})ly  because  it  promises  to  pay 
well.  He  forgets  that  the  rate  of  interest  on  in ifested  money, 
or  pure  interest,  is  very  small,  and  that  anything  above  that 
can  only  come  as  payment  for  management,  as  he  makes  in 
his  own  business,  or  at  the  sacrifice  of  some  essential  factor 
of  safetv  which  \\ill  usually  lead  to  disaster. 

For  the  successful  investment  of  money,  however,  a 
good  deal  more  is  required  than  the  mere  ability  to  select 
a  safe  security.  That  is  only  one  phase  of  the  problem. 
Scientific  investment  demands  a  clear  understanding  of  the 
fundamental  distinctions  between  different  classes  of  se- 
curities and  strict  adherence  to  the  two  cardinal  principles, 
distribution  of  risk  and  selection  of  securities  in  accordance 
with  real  requirements. 

One  of  the  most  important  distinctions  is  that  between 
jiromises  to  pay  and  equities.  Bonds,  real-estate  mortgages, 
and  loans  on  collateral  represent  somebody's  promise  to  pay 
a  certain  sum  of  money  at  a  future  date;  and  if  the  promise 
be  good  and  the  security  ample,  the  holder  of  the  promise 
will  be  paid  the  money  at  the  time  due.    On  the  othei*  hand, 

B.II— 14 


210  GEORGE  GARR  HENRY 

cquiticfi,  such  as  the  capital  stocks  of  })aiikin^,  railway,  and 
industrial  C()r})orations.  roprosent  only  a  certain  rosidnary 
share  in  the  assets  and  proiits  of  a  working  concern,  after 
pa}^nent  of  its  obliji^ations  and  fixed  cbar^^es.  Tlie  value  of 
this  residuary  share  mav  be  larc:e  or  small,  niav  increase  or 
diminish,  but  in  no  c<ise  can  the  holder  of  such  a  share  re- 
quire any  one,  least  of  all  the  company  itself,  to  redeem 
the  certificate  representing]:  his  interest  at  the  price  he  paid 
for  it,  nor  indeed  at  any  price.  If  a  man  buys  a  $1,000 
railroad  bond,  he  knows  that  the  railroad,  if  solvent,  will 
]iay  him  $1,000  in  cash  when  tlie  bond  is  due.  But  if  he 
buys  a  share  of  railroad  stock,  his  only  chance  of  getting 
his  money  back,  if  he  should  wish  it,  is  that  some  one  else 
will  want  to  buy  his  share  for  what  he  paid  for  it,  or  more. 
In  one  case  he  has  bought  a  promise  to  pay,  and  in  the  other 
an  cquiti). 

It  is  not  the  intention,  from  the  foregoing,  to  draw  the 
conclusion  that  equities  under  no  circumstances  are  to  be 
regarded  as  investments,  because  many  of  our  bank  and  rail- 
road  stocks,  and  even  some  of  our  public-utility  and  in- 
dustrial stocks,  have  attained  a  stability  and  permanence  of 
value  and  possess  sufficiently  long  dividend  records  to  jus- 
tify their  consideration  when  investments  are  contem]ilated  ; 
l)ut  it  is  essential  that  the  investor  should  have  a  thorough 
luiderstanding  of  the  distinction  iuxohcd. 

The  i^rinciple  of  distribution  of  risk  is  a  simple  one. 
It  involves  no  more  than  ol)edience  to  the  old  rule  which 
forbids  putting  all  one's  eggs  in  the  same  basket.  The  num- 
ber of  men  who  carry  out  this  principle  with  any  thonnigh- 
ness,  however,  is  very  small.  Proper  distribution  means  not 
onl\'  the  division  of  ])roperty  among  the  various  fonns  of 
investment,  as  railroad  bonds,  uuniicipals,  mortgages,  pub- 
lic utility  bonds,  etc.,  but  also  the  ])reservati«»n  of  j)roper 
geogra]diical  propoi-tions  within  each  form.  Adherence  to 
this  principle  is  perhaps  not  so  impoi'tant  for  private  in- 
vestors as  for  institutions.    A  striking  instance  of  the  need 


GENERAL  PRINCIPLES  OF  INVESTMENT     211 

for  insistence  upon  its  observance  in  the  institutional  field 
was  furnished  by  one  of  the  fire-insurance  companies  of 
San  Francisco  after  the  earthquake.  It  appeared  that  the 
company's  assets  were  largely  invested  in  San  Francisco 
real  estate  and  in  local  enterprises  generalh^  where  the  bulk 
of  its  fire  risks  were  concentrated.  As  a  result,  the  very  ca- 
tastrophe which  converted  its  risks  into  actual  liabilities  de- 
prived its  assets  of  all  immediate  value.  This  instance  serves 
to  show  the  importance  of  the  principle  and  the  necessity 
for  its  observance. 

The  principle  of  selection  in  accordance  with  real  re- 
quirements is  more  complex.  It  involves  a  thorough  under- 
standing of  the  chief  points  which  must  be  considered  in  the 
selection  of  all  investments.  These  are  five  in  number: 
(1)  Safety  of  principal  and  interest,  or  the  assurance  of  re- 
ceiving the  2)rincipal  and  interest  on  the  dates  due ;  (2)  rate 
of  income,  or  the  net  return  which  is  realized  on  the  actual 
amoimt  of  money  invested;  (3)  convertihility  into  cash,  or 
the  readiness  with  which  it  is  possible  to  realize  on  the  in- 
vestment; (4)  prospect  of  appreciation  in  value,  or  that 
growth  in  intrinsic  value  which  tends  to  advance  market 
price ;  and  (5)  stahility  of  market  price,  or  the  likelihood  of 
maintaining  the  integrity  of  the  principal  invested. 

The  five  qualities  above  enumerated  are  present  in  dif- 
ferent degrees  in  every  investment,  and  the  scientific  in- 
vestor naturally  selects  those  securities  which  possess  in  a 
high  degree  the  qualities  upon  which  he  wishes  to  place 
emi)hasis.  A  large  part  of  the  prol)lem  of  investment  lies 
in  the  careful  selection  of  securities  to  meet  one's  actual  re- 
quirements. The  average  investor  does  not  thoroughly  im- 
derstand  this  point.  He  does  not  realize  that  a  high  de- 
gree of  one  quality  involves  a  lower  degree  of  other  qual- 
ities. He  may  have  a  general  impression  that  a  high  rate 
of  income  is  apt  to  indicate  less  assurance  of  safety,  but  he 
rarely  applies  the  same  reasoning  to  other  qualities.  "When 
he  buys  securities,  he  is  quite  lilvely  to  pay  for  qualities  which 


212  GEORGE  GARR  HENRY 

he  does  not  need.  It  is  very  common,  for  example,  when 
he  wishes  to  make  a  permanent  investment  and  has  no 
thoii^^ht  of  reselling,  to  find  him  purchasing  securities  which 
possess  in  a  high  degi'ee  the  quality  of  convertibility. 
From  his  point  of  view,  this  is  pure  waste.  A  high  degree 
of  convorti))ilitv  is  onlv  obtained  at  tlie  sacrifice  of  some 
other  quality— usually  rate  of  income.  Tf  he  were  to  use 
moiT  cai'(^  in  his  selections,  he  could  probal)ly  find  some  other 
security  })ossessing  equal  safety,  equal  stability,  and  equal 
]^romise  of  appreciation  in  value,  wliich  would  yield  con- 
sid('i-al)ly  greater  revenue,  lacking  only  ready  convertibility. 
Thus  lie  W(tuld  satisfy  his  real  requirements  and  obtain  a 
greater  income,  at  the  expense  only  of  a  quality  which  he 
does  not  need. 

The  quality  of  convertibility  divides  investors  into 
classes  more  sharply  than  any  other  quality.  For  some  in- 
vestors convertibility  is  a  matter  of  small  importance;  for 
others,  it  is  the  paramount  consideration.  Generally  speak- 
ing, the  private  investor  does  not  need  to  place  much  em- 
phasis upon  the  quality  of  convertibility,  at  least  for  the 
larger  part  of  his  estate.  On  the  other  hand,  for  a  business 
surplus,  ready  convertibility  is  an  absolute  necessity,  and 
in  order  to  secure  it,  something  in  the  way  of  income  must 
usually  be  sacrificed. 

Again,  some  investors  are  so  situated  that  they  can  in- 
sist strongly  upon  promise  of  appreciation  in  value,  while 
others  cannot  afford  to  do  so.  Rich  men  whose  income  is 
in  excess  of  their  wants,  can  afford  to  forego  something 
in  the  w;iy  of  yearly  return  for  the  sake  of  a  strong  prospect 
of  a})]')rcciation  in  value.  Such  men  naturally  buy  bank 
and  trust-company  stocks,  whose  general  characteristic  is 
a  small  return  upon  the  money  invested,  but  a  strong  like- 
lihood of  appreciation  in  value.  This  is  owing  to  the  gen- 
eral practice  of  well-regulated  banks  to  distribute  only 
about  half  their  earnings  in  di\idends  and  to  credit  the  rest 
to  surplus,  thus  insuring  a  steady  rise  in  the  book  value 


GENERAL  PRINCIPLES  OF  INVESTMENT    213 

of  the  stock.  Rich  men,  again,  can  afford  to  take  chances 
with,  the  quality  of  safety,  for  the  sake  of  greater  income, 
in  a  way  which  poor  men  should  never  do.  In  practice, 
however,  if  the  writer's  observation  can  be  depended  upon, 
it  is  usually  the  poor  men  who  take  the  chances— and  lose 
their  money. 

In  the  quality  of  safety,  there  is  a  marked  difference 
between  safety  of  principal  and  safety  of  interest.  With 
some  investments  the  principal  is  much  safer  than  the  in- 
terest, and  vice  versa.  This  can  best  be  illustrated  by  ex- 
amples. The  bonds  of  terminal  companies,  which  are 
guaranteed  as  to  interest,  under  the  terms  of  a  lease,  by  the 
railroads  which  use  the  terminal,  are  usually  far  safer  as 
to  interest  than  as  to  j^rincipal.  While  the  lease  lasts,  the 
interest  is  i)robably  perfectly  secure,  but  when  the  lease  ex- 
pires and  the  bonds  mature,  the  railroads  may  see  fit  to 
abandon  the  terminal  and  build  one  elsewhere,  if  the  city 
has  grown  in  another  direction,  and  the  teiTninal  may  cease 
to  have  any  value  except  as  real  estate.  On  the  other  hand,  a 
new  railroad,  built  in  a  thinly  settled  but  rapidly  gi'owing 
part  of  the  country,  may  have  difficulty  in  bad  years  in  meet- 
ing its  interest  charges,  and  may  even  go  into  temporary 
default,  but  if  the  bonds  are  issued  at  a  low  rate  per  mile 
and  the  management  of  the  road  is  honest  and  capable,  the 
safety  of  the  principal  can  scarcely  be  questioned. 

Stability*-  of  market  price  is  frequently  a  consideration 
of  great  importance.  This  quality  should  never  be  confused 
with  the  qTiality  of  safety.  Safety  means  the  assurance 
that  the  maker  of  the  obligation  will  pay  principal  and  in- 
terest when  due ;  stability  of  market  price  means  that  the 
investment  shall  not  shrink  in  quoted  value.  These  are 
very  different  things,  though  frequently  identified  in  peo- 
ple's minds.  An  investment  may  possess  assured  safety 
of  principal  and  interest  and  yet  suffer  a  violent  decline 
in  quoted  price,  owing  to  a  change  in  general  business 
and  financial  conditions.     In  times  of  continued  business 


214  GEORGE  GARR  HENRY 

prosperity  vorv  ]n'j}i  rates  are  demaiuled  iov  tlie  use  of 
money,  because  the  liquid  capital  i>i'  the  country,  to  a  hirt^e 
extent,  has  been  converted  into  lixed  forms,  in  the  develo])- 
ment  of  new  mines,  the  ))uildinpj  of  new  factories  and  i-ail- 
roads,  and  in  the  improvement  and  extension  of  existing 
properties.  These  higli  rates  have  the  effect  of  reducing 
the  price  level  of  investment  securities  because  peo])le  liav- 
ing  such  securities  are  apt  to  sell  them  in  order  to  lend  the 
money  so  released,  thus  maintaining  the  parity  between  the 
yields  upon  free  and  invested  capital. 

As  an  ilhistration  of  this  tendency,  within  the  last  few 
years  New  Yoi'k  City  3^  per  cent  bonds  have  declined  from 
no  to  90,  without  the  slightest  suspicion  of  their  safety. 
Their  inherent  qualities  have  changed  in  no  respect  except 
that  their  prospect  of  appreciation  in  quoted  price  has  be- 
come decidedly  brighter.  Their  fall  in  price  has  l^een  due 
to  two  factors,  one  general  and  the  other  special— first,  the 
absorption  of  liquid  capital  and  consequent  rise  in  interest 
rates,  occasioned  by  the  unprecedented  business  activity  of 
the  country,  and,  second,  to  the  unfavorable  technical  posi- 
tion of  the  bonds,  due  to  an  increased  supply  in  the  face 
of  a  decreased  demand. 

It  will  be  seen  that  the  question  of  maintaining  the  in- 
tegrity of  the  money  invested  is  a  matter  of  great  impor- 
tance and  deserves  to  rank  as  a  fifth  factor  in  determining 
the  selection  of  investments,  although  it  is  not  an  inh(M'ent 
quality  of  each  investment,  but  is  dependent  for  its  effect 
upon  genei'al  conditions.  Tf  i1  is  essential  to  tlie  investor 
that  his  security  should  not  shrink  in  quoted  ]n-ice.  his  b(^st 
investment  is  a  real-estate  mortgage,  which  is  not  quoted 
and  eonsequently  does  not  fluctuate.  For  the  investment  of 
a  business  sui'])lus,  however,  where  a  high  degree  of  con- 
ver1il)ility  is  required,  real-estate  mortgages  will  not  an- 
swer, and  the  best  way  to  guard  against  shrinkage  is  to 
purchase  a  short-tenn  security,  whose  a]iproach  to  maturity 
will  maintain  the  price  close  to  par. 


GENERAL  PRINCIPLES  OF  INVESTMENT    215 

The  foregoing  coiimients,  in  a  brief  and  imperfect  way, 
serve  to  indicate  the  main  points  which  should  be  considered 
\n  the  selection  of  securities  for  investment.  The  main  les- 
son which  it  is  sought  to  draw  is  the  necessity  that  a  man 
should  have  a  thorough  understanding  of  his  real  require- 
ments before  he  attempts  to  make  investments.  For  a  private 
investor  to  go  to  a  banker  and  ask  him  to  suggest  a  security 
to  him  without  tellinc:  him  the  exact  nature  of  his  wants 
is  about  as  foolish  as  it  would  be  for  a  patient  to  go  to  a 
l)hysieian  and  ask  him  to  give  him  some  medicine  without 
telling  him  the  symptoms  of  the  trouble  which  he  wished 
cured.  In  neither  case  can  the  adviser  act  intelligently  un- 
less he  knows  what  end  he  is  seeking  to  accomplish. 

It  is  plainly  impossible  within  the  limits  of  a  single 
volume  to  consider  the  needs  of  all  classes  of  investors. 
Special  attention  will  be  paid  to  the  requirements  of  a  busi- 
ness surplus  and  of  the  private  investor.  In  the  field  of 
private  investment  two  distinct  classes  can  be  recognized— 
those  who  are  dependent  upon  income  from  investments  and 
those  who  are  not.  Both  classes  must  be  considered.  For 
the  investment  of  a  business  surplus,  safety,  convertibility, 
and  stability  of  price  are  the  qualities  to  be  emphasized ;  for 
investors  dependent  upon  income,  safety  and  a  high  re- 
turn ;  and  for  those  not  dependent  upon  income,  a  high  re- 
turn and  prospect  of  apin-eciation  in  value.  In  the  various 
articles  contained  in  this  volume,  bonds,  mortgages  and 
stocks  of  different  kinds  are  considered  in  turn,  their  ad- 
vantages and  disadvantages  analyzed,  and  their  adapta- 
bility to  the  requirements  of  a  business  surplus  and  of 
private  investment  discussed. 


SAFETY  AND  SECURITY. 


BY  JOHN  MOODY. 


[Author  of  "The  Truth  About  the  Trusts";   Editor  of  "Moody's  Manual  of 
Railroad  and  Corporation  Securities,"  etc.] 

Unless  ho  has  had  nnich  previous  experience,  the  pros- 
pective investor  ^vho  wishes  to  i)ut  his  money  at  work 
throuLch  Wall  Street  channels,  will  be  confronted  at  the 
outset  with  the  (juestions  of  "safety"  and  "security." 
Knowing  only  more  or  less  definitely  that  he  ought  not  to 
expect  a  return  of  more  than  4  to  5  j)er  cent,  if  he  wishes  to 
invest  his  money  securely,  he  naturally  seeks  more  expert 
advice  from  a  ])anker,  broker  or  general  dealer  in  invest- 
ment securities.  And  he  is  wise  in  doing  this,  provided  he 
exercises  good  judgment  in  the  selection  of  the  broker  or 
dealer.  But  brokers  and  dealers  in  investment  securities 
are,  of  course,  not  infallible;  their  judgment  is  sometimes 
biased,  and  they  may,  for  one  reason  or  another,  give  mi- 
sound  advice.  Plence,  it  is  all  the  more  necessary  that  the 
investor  should  inform  himself  regarding  the  merits  of  a 
given  security,  as  well  as  train  himself  in  the  art  of  an- 
alyzing investments  in  general. 

The  truth  is,  that  while  there  are  certain  fixed  rules  for 
proper  guidance,  every  bond  must  l)e  judged  by  itself  in 
order  to  be  analyzed  correctly.  For  instance,  a  man  may 
be  advised  to  invest  only  in  "first  mortgages,"  on  the  hypoth- 
esis that  by  putting  this  limitation  upon  his  field  of  in- 
vestment, he  will  there])v  insure  its  safetv.  But  such  ad- 
vice,  ap])lied  ])roadly  and  without  qualification,  is  essential- 
ly unsound.  A  fourth,  fifth  or  tenth  mortgage  on  some 
properties  may  be  far  more  secure  than  a  first  mortgage  on 
others.  For  instance,  the  Reading  Company  4s,  selling  at 
104,  are  a  much  safer  security  than  were  the  first  mortgage 

216 


SAFETY  AND  SECURITY  217 

bonds  of  the  Centralia  &  Chester  R.  R.,  issued  in  1S95, 
although  the  former  are  an  eighth  mortgage  on  parts  of 
the  main-line  of  the  Reading  system  and  were  originally  a 
lirst  mortgage  on  no  part  of  the  property.  Yet  they  are 
well  secured,  while  the  other  bond  defaulted  early  in  its 
life  and  its  holders  were  obliged  to  sacrifice  a  large  part  of 
their  principal  in  the  reorganization  which  followed  the  de- 
fault. Thus  it  will  be  seen  that  to  merely  advise  the  in- 
vestor to  confine  his  investments  to  first  mortgages  may  be 
most  misleading. 

Another  unsafe  method  of  judging  the  safety  of  bonds, 
is  to  assume  that,  because  they  are  secured  on  part  of  a 
large  railroad  system  and  "underlie"  one  or  more  issues  of 
secondarv  bonds,  their  securitv  is  absolutelv  assured.  This, 
like  the  former  theory,  contains  some  vital  flaws,  and  while 
it  holds  good  in  the  majority  of  instances,  if  followed  in 
others,  it  brings  very  disastrous  results.  Many  large  and 
important  railroad  corporations  absorb  tributary  or  com- 
peting lines  under  one  plan  or  another,  but  they  do  not 
alwaj^s  guarantee  the  securities  of  these  lines.  Bond  issues 
are  frequently  "assumed"  by  a  controlling  company,  ac- 
cording to  statements  circulated,  but  unless  thev  have  been 
specifically  guaranteed,  either  by  the  acquiring  corporation 
or  by  some  other  equally  responsible  concern,  it  does  not 
necessarilv  follow  that  the  credit  of  the  latter  is  back  of 
the  security  at  all.  The  acquired  line  may  turn  out  an  un- 
profitable and  losing  investment,  with  the  result  that  the 
larger  or  controlling  line  will  want  either  to  unload  its 
burden  or  to  scale  down  the  obligations  of  the  branch  to  a 
sum  approximately  less  than  the  latter  is  currently  earn- 
ing. There  are  many  methods  whereby  this  can  be  done,  as 
has  been  proved  many  times.  It  is  vital,  therefore,  that  the 
investor  should  base  his  entire  judgment  of  value  on  the 
property  itself,  regardless  of  the  parent  company,  unless 
indeed  the  latter  has  absolutely  assumed  and  guaranteed 
the  principal  and  interest  of  the  bond. 


218  JOHN  MOODY 

A  third  error,  wliicli  is  very  common,  is  to  assume  that 
because  a  Ixnul  is  listed  cm  one  or  more  of  the  stock  ex- 
clian.c^es,  it  is  therefore  safer  or  in  better  st^iiidiiig  than 
otherwise.  Such  ;i  iit)tion  is  entirely  unsound,  as  there  are 
far  more  bonds  of  the  liighest  .ijrade  and  (»f  the  best  security 
traded  in  on  the  various  markets  outside  of  the  exchanges 
themselves.  The  chief  advantas^e  of  a  security's  l)ein^ 
listed  on  an  exchange  is  that  it  there])y  secures  a  fixed 
quotation,  ])ut  the  fact  of  its  being  listed  does  not  l)ear  upon 
its  safety  in  anv  wav.  While  it  is  true  that  manv  of  the 
best  secured  ])onds  and  stocks  are  listed  on  the  exchanges, 
it  is  also  true  that  many  of  the  least  secured  are  listed  as 
well. 

In  contemi)lating  an  investnuait  in  a  given  security, 
each  case  should  be  judged  on  its  own  merits.  In  the  case 
of  a  railroad  bond,  it  is  not  the  question  of  whether  the  is- 
sue is  a  first  mortgage  or  a  Idanket  mortgage,  but  wliether 
the  value  of  the  property  on  which  it  is  secured  is  sufficient- 
ly in  excess  of  the  amount  of  the  mortgage,  and  whether 
the  income  from  the  property  is  sufficiently  in  excess  of  tlio 
amount  required  for  meeting  the  interest  on  the  bonds  and 
all  prior  obligations.  And  in  defining  value,  we  mean,  of 
course,  permanent  earning  power,  for  it  is  chiefly 
the  permanent  or  growing  earning  ]>ower  that  makes  the 
value.  For  instance,  the  New  York,  New  Haven  and  Ifai't- 
ford  railroad  lines,  between  New  York  and  Boston,  are 
l)onded  and  ('a])italized  for  an  amount  far  in  excess  of  tlu^ 
cost  of  replacing  the  actual  movable  pro]>ei"ty  of  the  com- 
])any.  T^ut  tlieic  are  other  assets  besides  rails  and  equip- 
ment which  make  railroad  i)roperty  valuable.  These  are 
its  location,  its  exclusive  rights  of  way  and  its  terminal 
sites  or  ])rivileges.  Tt  is  from  these  that  flows  its  chief  earn- 
ing power.  The  six  hundred  odd  miles  of  railroad  in  the 
New  Jersey  Central  svstem  mav  not  re])resent  much  moi-e 
movable  pro])erty  than  a  like  mileage  of  railroad  in  Mexico, 
and  mav  not  have  originally  cost  much  more  to  build.    But 


SAFETY  AND  SECURITY  219 

the  vast  dift'ereiice  in  value  will  be  round  in  the  location, 
in  the  vahie  of  the  land,  a  value  which  has  been  created  by 
the  influx  or  growth  of  population.  This  is  such  an  im- 
portant factor  that  the  value  of  a  property  at  once  a})- 
preciates  if  a  tendency  towards  more  rapid  growth  appears, 
while  it  tends  to  fall  in  all  cases  w^here  the  contrary  tend- 
ency develops.* 

The  rights  of  way  and  terminal  sites  and  privileges  are 
therefore  the  first  features  to  bear  in  mind  in  analyzing  the 
earning  power,  or  value.  And  it  must  also  be  borne  in  mind 
that  it  is  the  permanent,  or  average,  earning  power  rather 
than  the  possible  temporarj^  income,  which  is  to  be  consid- 
ered. By  permanency  is  meant  a  matter  of  generations, 
rather  than  vears.  ]\rost  railroad  bonds,  nowadavs,  run 
from  forty  to  one  hundred  years,  and  the  investor  must 
naturallv  be  assured  that  there  is  not  likelv  to  be  anv  real 

•  »  • 

depreciation  in  the  property,  if  properly  maintained,  in  the 
generations  to  come.  His  first  thought,  then,  must  be  to 
ascertain  if  the  influx  of  population  around  and  along  the 
lines  of  the  property  promises  to  continue  indefinitely;  and 
at  the  same  time  he  must  detennine  whether  the  value  of 
this  and  the  suiTounding  land  is  such  that  the  creation  of  a 
rival  right  of  way  is  out  of  question.  In  other  words,  his 
fundamental  asset  (the  site)  must  be  practically  exclusive, 
for  it  is  the  condition  of  exclusiveness  that  gives  it  most  of 
its  value. 

Having  assured  himself  as  to  this,  his  next  care  will  be 
to  see  that  the  probable  average  earning  capacity  of  the 
property  in  the  poorest  times  is  well  in  excess  (50  per  cent 
at  least)  <^f  all  requirements  for  interest  on  this  mortgage 
and  all  prior  charges,  as  well  as  for  full  maintenance  of  the 
property  in  every  respect.  The  investigation  of  this  phase 
of  the  enterprise  is  frequently  a  difficult  one,  as  reports  and 

*This  effect  of  population  on  land  values  is  brought  out  most  clearly  and 
scientifically  in  a  book  recently  written  by  Richard  M.  Hurd.  President  of  the 
Mortcrage  Bond  Co..  New  York,  entitled  "Principles  of  City  Land  Values." 
Copies  supplied  by  The  Moody  Corporation,  $1.50  each. 


220  JOHN  MOODY 

income  accounts  are  often  so  misleading  in  arrangement 
and  make-up  that  the  careless  investor  is  frequently  de- 
ceived by  an  elaborate  display  of  figures  which  may  mean 
very  little. 

But  even  though  the  investor  has  thoroughly  informed 
himself  regarding  the  above  characteristics,  there  are  many 
other  uncertainties  which  are  to  be  avoided  or  overcome. 
However,  if  he  has  been  careful  to  see  that  the  conditions 
described  above  are  all  present  in  a  given  investment,  his 
chances  of  losing  his  money  will  be  reduced  to  a  minimum. 
If,  on  the  other  hand,  he  neglects  these  precautions,  and 
adopts  other  rules  for  analyzing  the  security  or  i)Uts  his 
trust  in  the  "sav-so"  of  this  or  that  authoritv,  then  he 
stands  in  great  danger  of  sooner  or  later  coming  to  grief, 
as  will  be  shown  in  the  following  pages. 

Many  years  ago  the  careless  legislation  of  many  of  the 
states  permitted  railroad  and  other  corporations  to  decide 
for  themselves,  absolutely  without  restriction,  the  amounts 
of  obligations  they  might  i)ut  out,  and  therefore  it  was  no 
wonder  that  the  privilege  was  abused,  and  the  making  of 
shares  and  Ijonds,  the  latter  represented  to  be  amply 
secured  by  mortgage  liens,  was  carried  to  criminal  excess. 
One  illustration  will  siifiice. 

The  old  Arkansas  Central  Railway  Company,  located  in 
the  State  of  Arkansas,  built  only  forty-eight  miles  of  its 
projected  road.  The  road  was  of  narn^w  gauge,  with  very 
light  iron,  and  in  eveiy  way  cheaply  constructed.  Tt  cost 
less  than  ten  llmusand  dollars  per  mile,  including  equip- 
ment. As  has  Itccii  the  case  with  most  com})anies  building 
railways  in  new  territory,  helj^  in  its  behalf  was  asked  from 
the  communities  to  be  benefited,  and  their  bonds,  amount- 
ing to  nearly  half  a  million  dollars,  were  given  it  by  the 
counties,  cities,  etc.  Under  a  statute  providing  for  aid  to 
railroads  when  their  beds  c(uild  be  utilized  for  levee  pur- 
poses, the  company  got  $160,000  of  state  bonds.  Under 
another  statute  it  got,  as  a  loan  from  the  state,  the  latter 's 


SAFETY  AND  SECURITY  221 

bonds  to  the  amount  of  $1,350,000,  which  were  to  be  a  first 
lien  on  the  property.  After  such  abundant  assistance,  it 
would  have  appeared  hardly  necessary  for  the  company 
to  put  out  obligations  of  its  own.  However,  it  proceeded 
to  market  and  issue  its  own  debentures  to  the  amount  of 
$2,500,000,  of  which  $1,200,000  purported  to  be  secured  by 
first  mortgage,  a  representation  that,  for  reasons  already 
stated,  was  not  correct.  In  addition,  a  considerable  amount 
of  stock  certificates  were  issued.  Altogether,  nearly  $5,000,- 
000  of  paper  w^as  put  out  and  negotiated  on  the  basis  of 
forty-eight  miles  of  narrow-gauge  road.  But  this  proved 
to  be  insufficient.  The  road,  for  non-pa}Tiient  of  interest 
on  its  bonds,  soon  passed  into  the  hands  of  a  receiver, 
who  found  it  in  such  an  unfinished  state,  that  with  the 
court's  penuission,  he  issued  a  considerable  amount  of  his 
own  certificates  to  provide  for  necessary  repairs  and  better- 
ments. Then  the  road,  the  product  of  such  an  outlay,  was 
sold  at  ])ublic  auction  and  brought  the  magnificent  sum 
of  $40,000,  which  was  paid,  not  in  cash,  but  in  receiver's 
certificates  that  had  been  purchased  at  a  great  discount 
from  their  face! 

Twenty  or  thirty  years  ago,  nearly  all  first-class  securi- 
ties, outside  of  "governments"  and  "municipals,"  were 
steam  railroad  bonds  and  stocks.  But  we  now  have  stocks 
and  bonds  upon  the  market  representing  nearly  all  con- 
ceivable kinds  of  property,  industrial  and  manufacturing 
companies,  telegraphs,  telephones,  gas,  electric  light  and 
traction  companies,  water-works,  bridges,  oil  and  gas  wells, 
factories  and  mills  of  every  description,  patent  rights  of 
all  sorts,  steamboat  lines,  apartment  houses,  realty  enter- 
prises, and  even  cemeteries.  And  not  only  are  properties 
of  manv  kinds  used  to  issue  bonds  on,  but  manv  kinds  of 
bonds  are  often  issued  upon  the  same  properties.  Thus 
we  find  among  our  railroads  and  other  coiporations  not 
only  first,  second  and  third  mortgages,  but  income  bonds, 
debentures,  convertible  bonds,  consolidated  bonds,  redemp- 


222  JOHN  MOODY 

tion  bonds,  renewal  Ixdids,  terminal  lionds,  divisional 
bonds,  sinking  fnnd  bonds,  "))lanket-mortgage'"  bonds, 
collateral  tiMist  bonds,  equipment  bonds,  partieii)ating 
bonds,  joint  bonds,  and  l)onds  ad  nauseam,  until  they  lap 
and  overlap  in  seemingly  endless  complication.  Not  that 
merely,  but  one  issue  of  bonds  is  sometimes  made  the  liasis 
of  other  issues.  Indeed,  one  of  the  money-making  devices 
of  the  time  is  the  fonnati(m  of  companies  that  issue  their 
bonds  on  the  security  of  the  other  people's  bonds  that  they 
have  purchased,  either  yielding  a  higher  rate  of  interest 
or  obtained  at  lower  prices  than  they  expect  to  realize  for 
their  issues.  There  seems,  in  fact,  to  be  no  limit  to  the 
production  of  securities  that  are  spread  before  capitalists 
and  investors.  There  never  was  a  time  when  it  was  so 
easy  to  invest  monev  and  to  lose  it.  Of  the  securities  that 
are  offered  with  first-rate  recommendations,  it  is  probable 
that  about  one-third  are  actually  good,  one  third  have  some 
value,  and  one-third  are  practically  worthless.  Hence  the 
verv  natural  inference  that  whatever  art  there  mav  be  in 

»  * 

the  matter  of  investing  is  to  be  exercised  chiefly  in  tlie 
avoidance  of  unworthy  offerings,  and  it  is  to  that  point 
first  that  a  profitable  discussion  must  be  mainly  directed. 
For  the  condition  of  things  described,  the  laws  of  some 
of  our  states  in  giving  coiporations  almost  limitless  power 
to  issue  negotiable  paper,  as  well  as  in  permitting  all  sorts 
of  companies  to  incorporate  themselves,  are,  undcMil^edly, 
verv  largely  to  blame.  Our  banks  are  closely  watched  and 
very  jiroperly  restrained  from  taking  ]^eo])le's  money  on 
false  pretenses;  ])ut  is  it  nuich  betti'i-  f<»r  industi-ial  and 
other  corporations  to  take  it  by  means  of  legalized  ficti- 
tious evidences  of  value?  Banks  and  insurance  com])anies 
are  bv  no  means  the  onh'  institutions  that  need  watching. 
One  of  the  reforms  that  would  seem  to  be  worth  considera- 
tion is  legislation  ]n'ohibitory  of  the  creation  l)y  companies 
existing  by  authority  of  law  of  stocks  and  securities  not 
representing  cash  actually  paid  into  their  treasuries,  or 


SAFETY  AND  SECURITY  223 

proprietary  interests  whose  values  are  to  be  detenniued 
by  disinterested  parties.  Texas  has  incorporated  substan- 
tially sueli  a  provision  in  her  constitution.  Her  example 
should  be  followed  bv  all  other  commonwealths. 

But  the  securitv  behind  or  beneath  the  debenture  or 
other  paper  obligatory  is  not  the  only  thing  to  be  looked 
into  by  the  investor.  Even  the  form  of  the  document  may 
be  important.  A  case  in  point,  inasmuch  as  it  shows  how 
the  preparation  of  an  imdertaking  for  the  paj^ment  of 
money  may  change  its  apparent  value,  would  seem  in  this 
connection  to  be  appropriately  quoted.  Some  years  ago 
certain  townships  in  the  State  of  Missouri  were  desirous 
of  aiding  the  construction  of  railroads  with  their  credit. 
The  state  legislature,  to  that  end,  passed  an  act  authoriz- 
ing the  issue  and  sale  of  bonds  obligatory  upon  them;  but 
it  was  stipulated — a  very  singular  provision — that,  instead 
of  being  put  out  by  the  townships,  the  bonds  should  be 
executed  by  the  officials  of  the  counties  in  which  they  were 
located.  Accordingly  debentures  aggregating  several 
million  dollars  were  thus  prepared  and  disposed  of.  The 
bonds  bore  the  seals  of  the  counties  and  the  signatures 
of  their  officials.  On  the  back  and  at  the  top  of  each  signa- 
ture, in  large  letters,  were  the  words  ** county  bond."  The 
instrument  began  with  the  recital,  in  the  usual  form,  that 
it  was  issued  by  the  county,  but  further  on,  and  in  the 
smallest  type  employed,  came  the  statement  that  it  was 
executed  for  and  in  behalf  of  a  certain  to^\^lshi]),  which 
alone  was  to  be  responsible  for  its  payment.  These  bonds 
were  extensively  advertised  as  *' county  bonds,"  and  prob- 
ably in  most  instances,  certainly  in  many,  were  sold  as 
such,  and  it  was  not  until  purchasers  i^arted  with  their 
money,  that  they  discovered  that,  instead  of  getting  the 
bonds  of  well-known  and  wealthv  counties,  thev  had 
secured  only  the  obligations  of  townships  they  had  never 
heard  of  before.  It  was  then  manifest  enough  that  they 
had  been  made  the  victims  of  a  piece  of  very  sharp  and  very 


224  JOHN  MOODY 

shabby  practice.  lu  many  cases  the  buyers  of  bonds  and 
other  securities  learn,  when  it  is  too  late,  that  their  pur- 
chases, owing  to  some  obscure  and  apparently  innocent 
passage  that  had  been  overlooked  or  disregarded,  are  very 
different  from  wliat  they  thought  they  were  getting.  How 
often  have  careless  investors  who  supposed  they  were  pur- 
chasing undertakings  that  would  be  good  for  long  terms  of 
years,  and  who  probably  paid  premiums  to  obtain  them, 
ascertained  at  the  end  of  comparatively  short  intervals 
that  they  were  forced  to  accept  in  payment  the  amounts 
nominated  in  the  bonds  in  consequence  of  unnoticed  clauses 
giving  their  makers  power  to  redeem  their  oi)tion!  The 
lesson  of  such  cases  is  obvious  enough.  It  is  that  no  one 
should  buv  a  bond  or  stock  ^vithout  first  having  carefullv 
read  the  certificate.  This  may  seem  like  an  unnecessary 
warning;  but  in  truth  it  is  a  most  material  one.  Thousands 
and  thousands  of  dollars  have  been  lost  by  the  neglect  of 
this  simple  precaution.  "I  didn't  read  the  bond"  is  the  ex- 
planation that  has  again  and  again  been  offered  when  time 
has  disclosed  a  different  investment  from  the  one  intended 
to  be  paid  for.  The  fact  is  that  comparatively  few  un- 
professional bond  and  stock  purchasers  ever  carefully 
examine  the  instruments  they  acquire.  They  look  at  the 
headings,  those  parts  that  are  in  big  letters,  and  take  the 
rest  for  granted.  It  is  a  most  unwise  practice.  Unless  you 
are  previously  familiar  with  the  document  in  all  its  ]iarts, 
don't  fail  fn  read  it  before  you  buy.  Ixcnd  i1  all.  the  little 
ty])e  as  well  as  the  big  type,  the  indorsements,  the  coupons, 
and  all.  Don't  take  somebody's  else  word  for  it.  Examine 
the  seal.  Hie  signatures,  and  even  the  embellishments. 
Somethincr  mav  be  disclosed  that  will  ehan^e  vour  mind  and 
save  vour  monev. 

Ihit  if  there  are  trieks  in  the  making  of  securities,  even 
more  are  to  be  a])]irehended  in  the  selling  of  them,  and 
should  be  guarded  against  with  corresponding  diligence. 
It  is  a  nota))le  fact  that  no  poor  securities  are  ever  offered. 


SAFETY  AND  SECURITY  225 

They  are  always  good  so  long  as  tiiey  are  on  the  market. 
It  is  only  after  they  have  been  purchased  that  they  prove 
to  be  worthless.  Interest  has  never  been  known  to  fail 
on  bonds  that  are  seeking  investors,  although  default  has 
sometimes  followed  verv  closelv  on  the  sale  of  the  last  ob- 
ligations.  Indeed,  it  is  no  secret  that  interest  is  some- 
times paid  out  of  the  proceeds  of  the  bonds,  the  purchasers 
in  this  way  getting  a  portion  of  their  own  money  ]:)ack 
while  the  process  of  marketing  them  is  going  forward,  al- 
though such  a  thing  has  seldom  been  known  to  happen  after 
the  entire  issue  has  been  disposed  of.  The  advertisements 
of  some  bondsellers  are  often  marvellous  productions.  No 
such  securities  as  they  have  to  offer  have  ever  been  on  the 
market  before.  They  are  absolutely  safe;  they  pay  extra 
rates  of  interest,  etc.,  etc.  The  wonder  is  that  witli  so 
much  capital  seeking  investment,  it  is  found  necessary  to 
advertise  such  perfections  at  all!  In  such  cases  it  is  hardly 
necessary  to  say  that  the  only  safe  rule  for  investors  is  to 
find  other  uses  for  their  money,  however  strong  the  temp- 
tation mav  be. 

A  common  expedient  of  bond-makers  and  bond-mer- 
chants is  to  fortify  their  issues  with  the  favorable  opinions 
of  eminent  lawyers.  This  is  particularly  the  case  when  the 
obligations  of  municiiialities  or  of  com))anies  that  are  de- 
pendent upon  contracts  with  munici]x\lities  are  offered, 
some  municipalities  having  in  the  past  shown  an  unpleas- 
ant disposition  to  go  back  on  their  undei'takings.  No  ex- 
ceptions can  be  taken  to  the  practice  referred  to,  as  counsel 
learned  in  the  law  should  in  such  cases  always  be  consulted; 
but  the  writer  has  to  sav  that  he  has  never  vet  known  a 
security  so  poor  that  a  lawyer's  opinion  could  not  be  had 
to  back  it.  Such  testimonials  should  be  taken  for  what 
they  are  worth,  and  no  more. 

When  so  manv  seductive  baits  are  offered,  so  manv  nets 
and  traps,  contrived  and  constructed  by  clever  brains  and 
cunning  fingers,  are  spread  for  the  capture  of  those  having 

B.  VII— IS 


226  JOHN  MOODY 

money,  is  it  snrprisinc^  that  tho  careless  and  erediiloiis  are 
victimized,  and  even  that  tlic  satracious  and  ])rudent  sliould 
sometimes  be  taken  in?  Nevertheless,  for  the  losses  they 
have  sustained,  investors,  as  a  rnh',  have  themselves  chiefly 
to  ])lanH'.  The  mistakes  made,  in  nine  cases  out  of  ten,  liave 
been  tlic  i)urcliase  of  "cheap"  securities.  The  hojK'  of 
realizini;  a  little  metre  than  ordinary  interest,  by  buying 
paper  at  a  discoimt,  has  proved  to  be  the  rock  on  wliicli  nii- 
numliered  capitalists  have  split.  In  addition  to  their 
money's  worth,  they  have  endeavored  to  get  something  for 
nothing,  with  the  result  of  most  generally  getting  nothing 
for  something.  It  is  remarkaljle  how  blind  are  peo])le, 
ordinarily  sagacious  enough  to  make  money,  to  the  fact  that 
property  cannot  i^ay  a  revenue  beyond  its  jti-oducing  ca])ac- 
ity.  For  instance,  how  can  a  trolley  company,  whose  line 
is  wholly  or  mainly  Iniilt  from  the  proceeds  of  nioitgage 
bonds,  sell  them  at  a  heavy  discount,  besides  allowing  large 
commissions  for  the  selling,  and  then  pay  both  this  interest 
and  dividends  on  a  large  issue  of  watered  stock?  Or  how 
can  a  poor  agriculturist,  occupying  a  half-improved  farm 
out  on  the  frontier,  with  a  family  to  support  and  grain  sell- 
ing verily  above  the  cost  of  production,  pay  ten  or  twelve 
per  cent  upon  the  capital  with  which  he  does  business  .^ 

Bv  what  rule  or  rules  is  the  investor  to  govern  himself? 
No  formula  can  guarantee  him  absolute  safety.  One  thing, 
however,  he  can  properly  count  u]^on.  viz..  that  he  nnist 
expect  to  ]ydy  a  fair  ])rice  for  a  good  security — one  that  will 
retui'ii  him  no  more  than  a  moderate  interest  on  his  money. 
If  he  wants  to  speculate  and  is  willing  to  take  risks,  that 
is  another  thing,  lie  can  then  look  for  bargains.  The  cajii- 
talist  or  investor  who  sends  his  monev  into  a  new  section, 
or  puts  it  into  a  new  mechanical  ])rocess.  or  a  new  construc- 
tive enterprise,  may  or  may  not  make  a  hit,  but  for  the 
ordinai'v  and  c(mservative  o]ierator,  the  conditions  of  tln^ 
commercial  and  linaneial  world  give  warning  that  only 
reasonable  jn-olits  are  to  be  looked  for.    The  lirst  and  main 


SAFETY  AND  SECURITY  227 

thing  to  be  studied  is  safety.    And  yet  tliere  is  such  a  tiling 
as  going  too  far  in  the  matter  of  prudence.    The  investor 
may  pay  too  dearly  for  safety.    There  are  securities  which, 
compared  with  others  that  are  to  be  had,  sell  at  prices  nuich 
above  their  real  worth.     The  reason  is  that  everybody 
knows  them  to  be  good,  and  investors  who  don't  want  to 
take  the  trouble  to  investigate,  or  are  afraid  to  trust  both 
their  own  judgment  and  the  counsels  of  their  friends,  are 
willing  to  pay  extra  prices  for  them.    But  there  are  plenty 
of  others  that  may  be  had  at  lower  figures,  which  are  just 
as  good.    There  is  no  reason  in  the  world  why  the  investor 
should  not  safely  invest  at  a  rate  that  will  generally  yield 
him  4  per  cent  to  5  per  cent  interest,  and  have  his  invest- 
ment as  secure  as  any  property  can  be  under  human  super- 
vision.   As  heretofore  stated,  with  the  creation  of  new  en- 
terprises and  properties,  and  the  development  of  old  ones, 
new  securities  are  constantly  appearing  in  this  country 
and  a  fair  share  of  them  ought  to  be  good.    Indeed,  our 
securities  ought  to  be  the  best  in  the  world.    The  sure  and 
rapid  growth  of  our  resources  supplies  a  reliable  support 
as  long  as  fair  intelligence  and  common  honesty  attend 
their  production.    The  only  thing  is  to  choose  with  discre- 
tion, so  many  doubtful  and  even  fraudulent  issues  appear- 
ing at  the  same  time;  Init  no  more  judgment  is  really  de- 
manded than  in  purchasing  lands  or  cattle. 

Two  common  and  often  fatal  mistakes  should  l)e 
avoided.  One  is  in  relying  solely  upon  the  advice  of  an- 
other. No  one  competent  to  form  an  opinion  for  himself 
should  put  his  pecuniary  interests  unresei'vedly  in  the  keep- 
ing of  another.  Such  absolute  confidence  invites  betrayal. 
By  far  the  greater  munber  of  losses  to  investors  have  been 
in  securities  purchased  exclusively  on  the  reconunendation 
of  interested  outside  parties.  "While  it  is  well  to  Lid  the 
opinion  of  a  reputable  broker,  the  purchaser  should  in- 
vestigate for  himself.  The  other  mistake  is  to  give  prefer- 
ence unifoi'mly  to  listed  securities.    As  pointed  out  at  the 


228  JOHN  MOODY 

beginning  of  this  article,  many  persons  seem  to  think  that 
stocks  and  bonds  must  have  a  value  if  they  are  quoted  at 
some  stock  exchange,  forgetting  how  many  fancies  have 
been  ballooned  until  they  have  burst  at  such  places.  On 
the  contrary,  such  a  position  is  likely  to  expose  them  to 
manipulation  for  i»urely  speculative  purposes.  Stock-ex- 
change quotations  are  often  unsafe  guides  to  buyers.  They 
represent  not  mc^rely  the  value  of  the  property  but  also  the 
pitch  of  speculation  at  the  time.  When  securities  are  con- 
verted into  foot-balls  for  gamblers  to  play  with,  they  are 
pretty  certain  to  be  too  high  or  too  low.  The  main  advan- 
tage they  can  have  is  a  readier  marketability  in  case  of  an 
urgent  need  to  sell;  l)ut  it  is  at  the  times  when  such  need 
is  likely  to  exist  that  they  are  pretty  certain  to  be  at  the 
lower  point.  No  speculative  help  can  long  take  the  place 
of  real  value.  Securities,  in  the  long  run,  must  stand  upon 
their  merits,  and  purchasers  have  merely  to  follow  business 
principles  as  taught  by  the  canons  of  common  sense. 

In  seeking  investments,  and  especially  long  time  invest- 
ments, there  are  several  things  to  be  taken  into  account. 
There  is  not  only  the  question  of  the  kind  of  security  to  pur- 
chase, but  the  question  of  the  time  of  purchase.  There  are 
opportunities  to  be  looked  for  as  well  as  pitfalls  to  be 
shunned.  It  is  during  periods  and  seasons  of  depression, 
when  securities  are  forced  upon  the  market,  often  to  be 
sacrificed — and  such  opportunities  are  certain  to  come  if 
waited  for  long  enough — that  the  shrewd  investor  finds  his 
richest  harvest.  That,  however,  cannot  be  said  of  the  ordi- 
nary investor.  lie  usually  buys  when  securities  are  up  and 
confidence  is  unimpaired,  and  becoming  frightened  as  the 
market  values  go  down,  sells  when  they  are  at  the  bottom, 
and  holds  his  money  to  reinvest  in  something  else  no  better, 
and  probably  not  as  good,  when  the  tide  has  turned.  As 
a  rule,  the  best  time  to  invest  is  when  others  are  unload- 
ing. In  money  matters  it  is  never  safe  to  follow  ''the 
crowd."    Nor  is  it  safe,  (which  is  little  more  than  the  ex- 


SAFETY  AND  SECURITY  229 

pressiou  of  the  same  idea  in  another  form)  to  purchase  a 
security  when  it  is  on  the  ''boom."  A  peculiarity  of  our 
money  market,  conservative  as  it  is  popularly  supposed  to 
be,  is  that  it  is  constantly  changing  its  favorites.  Its  offer- 
ings come  in  waves.  Its  dealings  at  one  time  may  be  chiefly 
in  railways,  at  another  in  industrial  obligations,  and  at  an- 
other the  excitement  mav  run  to  minins:  shares  or  mort- 
gages  on  ranches  and  real  estate.  For  the  time  all  profes- 
sional brokers  and  bond  and  share  sellers  urge  their  cus- 
tomers to  adopt  the  popular  issue,  of  which,  as  the  result 
of  the  increased  demand,  there  is  almost  certain  to  be  ex- 
cessive, if  not  fraudulent  production.  To  yield  to  the  pres- 
sure of  such  a  time  is  alwavs  riskv.  Old  and  tried  secu- 
rities,  like  old  friends,  are  likel}^  to  be  the  truest  and  the 
best. 

One  thing  the  investor  would  do  well  never  to  forget, 
is  that  there  are  always  plenty  of  good  securities  in  the 
market.  No  one  with  money  need  ever  fear  that  others  will 
get  all  the  solid  investments,  and,  in  the  apprehension  that 
there  will  not  be  enough  of  that  sort  to  go  around,  put  up 
with  an  inferior  article.  Don't  let  him  choose  what  is  not 
altogether  satisfactory,  under  the  impression  that  nothing 
else  as  good  or  better  will  offer.  If  he  does  so,  sooner  or 
later  he  will  regret  it.  Something  good  always  comes  to 
him  who  waits  with  money  in  his  hand. 

Another  thing  of  a  precautionary  nature  it  is  well 
enough  for  the  investor  to  do,  and  that  is  to  scatter  his  pur- 
chases. The  old  a'dage  about  not  putting  all  the  eggs  in 
one  basket  applies  with  peculiar  force  to  investments.  The 
tendency  with  those  having  moderate  sums  to  invest,  and 
who  need  to  be  the  most  circumspect,  is  to  make  up  their 
minds  in  favor  of  a  single  line  of  securities  and  put  every- 
thing there.  Of  course,  a  failure  in  that  quarter  is  particu- 
larly disastrous.  The  writer  knew  a  man,  some  years  ago, 
who  decided  in  favor  of  municipal  oliligations,  saying  that 
he  had  satisfied  himself  that,  on  the  whole,  there  was  noth- 


230  JOHN  MOODY 

ing  else  so  rolialilo.  Arcoi-dincjly  lio  put  his  entire  available 
means  into  thcin.  I'lit  itracticiiii,^  .•ihundant  preeantion.  as 
lie  sii])]i(isc(l,  lie  (lixidcd  liis  money  equally  anionfj  nuuii('i]ial 
issues  of  Illinois,  Missouri  and  Kansas,  they  ha  vine:  the 
most  pa])er  at  that  time  on  the  market.  He  thought  he  was 
entirely  safe  as  to  princi]ial.  But  soon  after  a  wave  of 
repudiati(m  sentiment  swept  over  that  part  of  the  country, 
and  evei'v  one  of  his  Ixtiids  was  left  in  default.  It  is  well 
enough  to  scatter  in  kind  as  well  as  in  locality. 

Against  the  theory  of  scattering  investments,  men  some- 
times (juote  the  advice  of  Andrew  Carnegie  to  *'put  all 
your  eggs  in  one  basket,  and  watch  the  basket."  This 
principle,  however,  while  sound  enough  for  the  expert  or 
specialist  who  is  in  a  situation  at  all  times  to  see  and  watch 
the  basket,  is  not  applicable  to  the  average  ordinary  in- 
vestor. The  average  investor  sim})ly  cannot  "watch  the 
basket"  in  the  way  implied  by  ]\Ir.  rarnegie,  and  there- 
fore it  is  a  safe  princi])le  for  him,  undi-r  all  ordinary  cir- 
cumstances, to  limit  his  chances  of  loss  to  the  greatest  pos- 
sible extent  through  a  wide  and  judicious  distribution  of  his 
capital. 


THE  OBLIGATION  OF  THE  INVESTMENT  BANKER  TO 

HIS  CLIENTS. 

BY  ALLEN  G.  HOYT. 

[Of   N.   W.   Halscy  &  Co.] 

Investment  banking  is  a  serious,  responsible  business. 
An  investment  banker  is  in  one  sense  like  a  mercbant.  He 
buvs  securities  at  wbolesale  and  sells  them  at  retail.  In  an- 
other  sense  he  is  a  counsellor.  He  must  offer  his  clients 
sound  advice  regarding  their  investments.  He  nuist  recom- 
mend to  each  customer  securities  adapted  to  the  particular 
needs  of  that  customer. 

The  banker  as  a  merchant  is  under  the  heaviest  of  obli- 
gations to  handle  goods  of  honest  vahie.  He  may  not  take 
advantage  of  the  principle  of  ** Caveat  emptor."  Unlike 
most  wares  sold  by  merchants,  the  goods  a  bond  dealer 
handles  must  never  wear  out.  They  must  remain  vsound  and 
true  for  ten,  twenty,  or  fifty  years,  and  at  the  end  of  their 
life  thev  must  be  redeemed  at  their  full  face  value. 

The  investment  banker,  therefore,  who  has  a  proper  ap- 
preciation of  the  nature  of  his  calling  will  make  the  matter 
of  safety  of  the  securities  he  handles  his  chief  concern.  He 
will  bring  to  his  aid  all  his  skill,  judgment  and  experience, 
to  assure  himself  of  the  soundness  of  the  bonds  he  offers. 

The  responsibilities  of  the  bond  dealer  are  particularly 
heavy  for  another  reason.  His  client  frequently  when  buy- 
ing securities  relies  absolutely  and  com])letely  upon  his 
recommendations.  The  investor  has  neither  the  time,  the 
money,  the  knowledge,  noi*  the  ex])erience  necessary  to  en- 
able him  to  determine  the  value  of  the  bonds  he  is  buying. 
He  is  completely  in  the  banker's  hands.  Tbc  dealer  of  the 
right  sort  will  not  regard  liulitly  the  obligations  imposed 
upon  him  by  the  relation  of  trust  which  he  bears  to  his  client. 

231 


232  ALLEN  G.  HOYT 

The  banker  ou.c:lit  to  be  exeeedin.ely  careful  of  the  ehar- 
acter  of  the  bonds  he  sells.  People  buy  of  him  for  invest- 
ment; they  are  not  speculating  and  they  cannot  afford  to 
lose.  ]\lany  of  his  clients  are  al)Solutely  dependent  upon  the 
income  from  the  securities  they  Iniy  for  the  wherewithal 
with  which  to  live.  If  any  of  the  securities  turn  out  to  be 
worthless  some  of  the  holders  may  actually  suffer  foi-  the 
necessities  of  life.  The  bond  buyer  does  not  expect  to  take 
any  chances;  he  is  a  loaner  of  money  and  all  he  is  promised 
for  parting"  with  his  money  is  the  pa^inent  of  the  loan  at  ma- 
turity with  a  certain  specified  rate  of  interest  for  the  use  of 
the  money  bv  the  borrower.  The  bond  buver  who  buvs  the 
securities  of  a  corporation,  for  instance,  will  be  entitled  to 
receive  only  the  interest  on  his  money  and  the  payment  of 
the  principal  at  maturity.  No  matter  how  successful  the 
corporation  may  be  the  bond  buyer  e^ets  no  part  of  the  sur- 
plus earninc^s  of  the  corporation,  however  larcje  they  may 
become.  The  earninp:s,  above  the  pa^nnent  of  the  interest 
on  the  indebtedness,  belong  to  the  stockholders,  who  are.  in 
fact,  the  oAMiers  of  the  property.  If  any  risks  are  to  l)e  in- 
curred, the  stockholders  should  take  them.  The  bondholder 
is  merely  a  creditor;  he  is  concerned  only  in  the  security  for 
his  l(»an  and  that  security  ought  to  be  ample. 

So  the  investment  banker,  in  investigating  this  matter 
of  the  safety  of  the  bonds  he  offers  to  his  elients,  spends  a 
great  amount  of  his  time  and  money.  He  brings  all  his 
skill,  judgment  and  experience  to  bear  on  this  all-important 
question,  and  if  the  banker  is  lacking  in  skill,  if  his  judg- 
ment is  faulty,  or  if  his  ex]ierience  iii  his  profession  has  been 
limited,  disaster  is  almost  certainly  in  store  for  him  and  his 
clients  through  the  i^urchase  of  unsound  securities. 

Tti  dealing  in  public  utility  and  iTidustrial  bonds,  the 
respoTisibility  of  the  banker  to  his  clients  is  particularly 
heavy.  Public  utility  or  public  service  corporations  are 
companies  whieh  sup])ly  such  necessities  of  modern  urban 
existence  as  gas  for  lighting  and  heating,  electricity  for 


THE  INVESTMENT  BANKER  233 

lighting  and  power  and  transportation  by  means  of  surface, 
elevated  or  sub^Yay  lines.  Public  utility  bonds,  as  a  class, 
rank  higher  than  industrial  bonds,  because  the  earnings 
of  public  utility  corporations  are  not  subject  to  the  same 
fluctuations  from  year  to  year,  and  because  in  years  of  busi- 
ness depression,  the  earnings  do  not  shrink  nearly  so  severe- 
ly as  do  the  earnings  of  most  industrial  corporations. 

AYhen  a  banker  handles  an  issue  of  public  utility  bonds, 
he,  either  alone  or  with  associates,  handles  the  entire  issue. 
Pie  becomes  identified  with  the  property  and  on  him  is  the 
entire  responsibility  for  the  future  history  of  the  bonds. 
Therefore,  the  examination  which  the  conscientious  banker 
makes  before  he  purchases  an  issue  of  public  service  corpor- 
ation bonds  is  particularly  thorough  and  exhaustive.  He 
not  only  emjjloys  his  own  experts  but  calls  to  his  aid  outside 
engineers,  auditors  and  corpoi'ation  lawyers  of  the  highest 
rank.  He  investigates  the  character  of  the  comnumity 
served,  the  condition  and  value  of  the  property  by  a  mort- 
gage on  which  the  bonds  are  secured,  the  management,  the 
adequacy  of  the  earnings,  the  franchises,  the  question  of 
over-capitalization,  the  chance  of  future  success,  the  legal- 
ity of  the  ])ond  issue,  and  so  forth.  He  studies  the  corpora- 
tion from  every  point  of  view  possible. 

It  is  my  opinion  that  if  the  public  service  corporation 
bond  meets  the  i-equirements  of  the  conservative,  conscien- 
tious and  successful  banker,  there  is  no  other  security  so  well 
adapted  to  the  needs  of  the  average  investor. 

Such  bonds  are  safe :  they  yield  a  higher  rate  of  interest 
than  do  other  classes  of  bonds  of  equal  merit  and  their  mar- 
ket history,  for  the  past  ten  years  at  least,  compares  very 
favorably  with  that  of  railroad  and  municipal  bonds. 

Public  service  coi-porations  have,  as  a  class,  grown  and 
prospered  greatly  during  the  past  decade.  This  has  been  to 
a  considerable  extent  due  to  the  rapid  growth  of  the  munic- 
ipalities they  have  served.  The  recent  census  has  demon- 
strated that  nearlv  all  American  cities  of  substantial  size 


234  ALLEN  G.  HOYT 

have  increased  materially  in  population  since  the  enumer- 
ation of  190U.  The  statistics  of  our  better  jjublic  service 
corporations  show  that  their  business  has  grown  even  more 
ra])i(ll\-.  With  a  more  general  appreciation  of  the  merits 
of  the  riglit  kind  of  corporation  securities,  there  has  devel- 
oiK'd  a  broader  demand  for  them.  AVhile  during  the  past 
decade  there  has  l)een  a  decline  in  the  prices  of  most  liigli 
grade  railroad  and  municipal  bonds,  due  probably  to  the 
fact  that  capital  is  worth  more  today  than  it  was  ten  years 
ago,  corporation  bonds,  since  they  bear  the  higher  rate  of 
interest  now  demanded  by  capital,  sell  close  to  the  prices 
they  brought  ten  or  fifteen  years  ago.  The  broader  demand 
for  this  class  of  bonds  taken  in  connection  with  the  gro\\'th 
in  strength  and  prestige  of  the  issuing  companies  has  pre- 
vented them  from  showing  the  same  decline  in  market  value 
that  has  overtaken  railroad  and  munici]xal  bonds. 

As  I  have  said  before,  the  responsibilities  of  the  banker 
in  dealing  in  corporation  bonds  are  particularly  heavy.  As 
the  banker  iisuallv  buvs  an  entire  issue,  the  bonds  are  held 
cxclusivelv  bv  his  own  clients,  and  he  must  not  onlv  be  con- 
vinced  that  the  bonds  are  safe  but  he  must  make  a  market 
for  them  as  well,  in  order  that  his  clients  may  borrow  on 
them  or  convert  them  into  cash,  if  they  find  it  necessary  to 
do  so.  The  banker  must  not  only  assure  himself  that  the 
bonds  are  sound  when  he  buys  them  but  that  they  will  ron- 
tinue  safe  under  whatever  conditions  mav  arise.  lie  usuallv 
kee]is  in  touch  with  the  property  as  long  as  the  bonds  are  out- 
standing and  often  by  advice  or  moral  ]iressure  or  some  oth- 
er influence  he  is  able  to  prevent  ill-considered  action  on  the 
part  of  the  owners  of  the  property  which  might  prejudice 
the  standing  of  the  securities. 

That  our  better  bankers  do  not  regard  lightly  their  re- 
sponsiliilities  to  their  clients  I  can  illustrate  by  an  example 
which  has  come  to  my  attention. 

In  one  case  the  facts  were  about  as  follows:  (T  have 
changed  them  sufficiently  to  prevent  identification  of  the 


THE  INVESTMENT  BANKER  235 

particular  situation).  A  group  of  bankers  handled  the 
bonds  of  a  hydro-electric  company.  The  company  had  been 
in  operation  but  a  comparatively  short  time,  when  a  terrilic 
fl(H)d  carried  away  the  dam  and  did  other  damage  which 
virtually  destroyed  the  power  plant.  The  bankers  came  for- 
ward and  reconstructed  the  dam  and  the  power  house  at  a 
cost  of  about  three  quarters  of  a  million  dollars.  For  their 
advances  to  the  company  they  took  junior  securities,  wiiich 
have  a  very  questionable  value.  It  will  be  a  great  many 
years  before  the  bankers  will  get  back  the  money  they  ad- 
vanced, if— in  fact— they  ever  do.  They  took  this  action 
with  a  view  only  of  protecting  the  interests  of  their  clients 
who  had  purchased  the  first  mortgage  bonds  of  the  company. 
Had  they  not  provided  the  funds  for  the  reconstruction  of 
the  dam  and  plant,  their  bondholders  would  have  suffered 
heavy  losses.  The  bankers,  although  they  WTre  not  legally 
liable,  preferred  to  make  a  heavy  sacrifice  rather  than  have 
their  bondholders  suffer. 

AVhile  this  is  an  exceptional  case,  the  dealer  in  corpora- 
tion bonds  ought  to  enjoy  a  high  standing,  the  best  of  credit 
and  to  have  ample  resources  at  his  command.  The  secu- 
I'ities  handled  by  a  banker  with  such  a  standing  are  exceed- 
in  alv  unlikelv  to  cause  their  owners  anv  trouble,  but  if  bv 
any  chance  the  corporation  issuing  the  bonds  is  overtaken  by 
misfortune,  the  banker  will  be  in  a  position  to  aid  the  cor- 
poration financially,  if  the  situation  warrants,  or  to  demand 
that  his  clients  as  bondholders  be  treated  fairly  by  the  re- 
ceiver and  that  thev  are  not  defrauded  or  bilked  bv  anv 

•  •  • 

equitable  reorganization  or  other  scheme. 

Such  an  instance  as  T  have  mentioned  shows  how  strong 
a  sense  of  honor  governs  the  actions  of  some  bankers  and 
how  highly  they  regard  their  obligations  to  their  clients. 


THE  STUDY  OF  FUNDAMENTALS  AND  THEIR 
BEARING  ON  SECURITY  PRICES. 

BY  THOMAS  GIBSON. 

[Author  of  "The   Pitfalls  of  Speculation.  '  'The  Cycles  of  Speculation."  "The 
Increasing  Gold  Supply."  etc.] 

The  examination  of  fuudaiiieiilaLs  as  to  tlii'ir  bearing  on 
security  values  and  prices  and  as  a  means  of  intelligently 
forecasting  price  movements  is  a  most  importaiit  study. 
Such  examinations  I  regret  to  state  are  frequently  char- 
acterized as  useless.  This  is  because  the  study  is  not  care- 
fully and  conscientiously  conducted  with  a  clear  understand- 
ing of  what  must  be  done  and  what  must  be  expected. 

One  of  the  most  common,  and  at  the  same  time,  most 
fatal  of  the  errors  we  are  apt  to  fall  into,  in  conducting  our 
investigations,  is  the  attempt  to  reconcile  present  conditions 
with  the  action  of  the  stock  market.  Security  prices  always 
move  ahead  of  basic  developments,  never  after  or  in  connec- 
tion with  such  developments.  Tn  1905  and  190().  for  ex- 
am])le,  we  had  a  gi-eat  advance  in  the  stock  market.  This 
advance  represented  the  anteriority  of  security  ])rices,  the 
anticipation  marketwise  of  the  great  business  boom  of  IDCT. 
But  when  that  business  boom  arrived,  the  stock  market  had 
fully  discounted  it  and  had  begun  the  woik  of  discounting 
the  depression  of  1910  and  1911.  This  precession  of  prices 
when  not  clearly  understood  causes  many  jieojile  to  say 
that  the  security  mai'ket  is  irrational ;  that  it  does  not  act  as 
it  should  act;  that  prices  decliiu"  in  good  times  and  advance 
in  bad  times,  etc. 

Nevertheless,  security  prices  are,  in  the  last  analysis, 
aJwfii/s  based  on  values,  and  values  are  in  turn  dependent 
largely  upon  prosperity  and  basic  conditions.  Good  man- 
agement, economical  administration,  territorial  growth  and 
other  things  must  be  considered  in  arriving  at  true  values 

236 


FUNDAMENTALS  AND  SECURITY  PRICES    237 

but  widespread  prosperity  is  tlie  most  important  single 
factor.  Prices  frequently  become  divorced  temporarily 
from  values  through  manipulation,  fighting  for  control  or 
technical  conditions,  but  the  hiatus  must  sooner  or  later 
disappear  and  prices  and  values  will  be  reconciled.  It  is 
when  prices  are  lower  or  higher  than  values,  present  or 
prospective,  that  we  have  our  greatest  speculative  oppor- 
tunities. I  wish  to  explain,  parenthetically,  that  in  using 
the  word  speculation  or  its  derivatives,  I  employ  it  in  its 
broadest  sense  and  not  according:  to  its  popular  usage.  Spec- 
ulation is  not  confined  to  gaml)ling  on  margins.  Any  man 
who  buys  because  he  believes  a  thing  to  be  cheap  and  in  the 
belief  that  it  will  advance  in  price  is  speculating,  whether 
he  pays  cash  or  buys  on  margin.  That  definition  applies  to 
coal  or  bricks  or  real  estate  or  to  anything  else.  It  is  not 
confined  to  securities  alone. 

As  security  prices  always  anticipate  fundamental  con- 
ditions, it  is  necessary  in  our  study  of  basic  causes  that  we 
must  deal  with  the  future  and  with  what  is  now^  unknown. 
This  may  appear  paradoxical,  but  it  is  not  so.  What  we 
undertake  is,  by  a  study  of  precedent  and  an  examination 
of  present  development,  to  arrive  at  reasonable  conclusions 
as  to  the  future  and  to  act  accordingly. 

The  examination  of  precedent  is  most  important.  Such 
examinations  carefully  conducted  will  show  us  with  a  rea- 
sonable degree  of  accuracy  what  has  followed  certain  con- 
ditions in  the  past  and  what  may  be  expected  to  follow  simi- 
lar conditions  in  the  future.  We  will  also  learn  in  about 
what  ratio  our  population,  cultivated  acreage,  earnings, 
etc.,  should  nafuraUf/  increase  and  we  may  so  decide  wheth- 
er advancement  is  deficient,  normal  or  abnormal. 

Students  of  fundamentals  frequently  fall  into  a  very 
serious  error  by  allowing  their  examination  of  precedent  to 
extend  over  too  brief  a  period.  Comparisons  of  one  month 
with  a  preceding  month  are  ridiculous,  as  such  comparisons 
do  not  allow  for  seasonable  changes.    There  are  certain  lean 


238  THOMAS  GIBSON 

and  fat  months  or  seasons  in  all  lines  of  l)usinoss.  And  the 
t'onipaiisons  of  one  yoai'  witli  a  jn'ocoding  year  are  also  fre- 
quently insulTicient.  Tf,  foi-  exani])le,  our  railroad  earn- 
intis  should  hound  \m  aluioimallv  foi*  two  vears  as  thev  did 
ill  1909  and  1910,  a  moderate  I'eaetion  in  the  followini^:  year 
Would  not  he  unusual  or  diseoura.iring.  Tn  the  year  1909, 
the  .«,n'oss  earnings  of  all  railroads  in  the  Ignited  States  ad- 
vanced $278,038,372  as  compared  with  1908,  and  in  1910 
they  increased  $229,840,433  as  compared  with  1909.  But 
even  after  this  unprecedented  gain,  we  hear  numerous  com- 
plaints ])ecause  of  some  small  decreases  in  certain  months 
of  1911. 

Let  me  point  out  another  instance  which  even  more  dis- 
tinctly illustrates  the  folly  of  such  comparisons.  A  few 
days  ago  an  article  appeared  in  a  leading  tinancial  organ, 
bemoaning  the  increase  in  our  idle  cars.  It  was  shown  that 
idle  cars  in  ^fay,  1911,  amounted  to  about  187,000  cars  as 
compared  with  only  122,000  in  May,  1910.  Xothing  was 
said  about  ^^fay  being  the  month  in  which  we  almost  in- 
varia])ly  find  the  largest  number  of  idle  cars,  but  what  makes 
the  argimient  most  inadequate  and  misleading  is  the  com- 
parison with  a  single  year.  Tf  tlie  writer  of  that  screed 
had  taheii  the  pains  to  go  back  a  little  further  he  would  have 
found  that  the  number  of  idle  cars  in  ^fay,  1911.  was  the 
smallest  in  recent  years  ii'ifh  fltr  shif/lr  crccj^fioti  of  HH". 
Tn  M-Av,  1907,  we  had  300,000  idle  cars  and  in  November  of 
that  year  a  shorfar/r  of  90.000  cars:  in  :\ray,  1908,  we  had 
over  400.000  idle  cars  and  in  October  only  100,000.  Tn  May, 
1909,  w."  had  285,000  idle  cars  and  in  October  a  shortage 
of  5,400  cars.  Idle  cars  at  certain  seasons  are  inevital^le. 
They  are  necessary.  We  must  have  them  in  the  cro})-m(>v- 
ing  pei'iod  oi-  business  would  be  thrown  into  chaos.  Tn  the 
dull  months  we  camiot  retire  our  sur])lus  cars  on  the  same 
plan  as  is  proposed  for  surplus  banknotes.  As  our  ]^o]nila- 
tion  grows  and  as  we  build  idle  cars  to  meet  such  growth, 
we  should,  everything  being  equal,  have  more  idle  cars  in 
the  dull  periods  from  year  to  year. 


FUNDAMENTALS  AND  SECURITY  PRICES    239 

I  cannot  pretend  in  the  space  at  inv  disposal  to  ^ive  a 
('onii)reliensive  formula  for  the  study  of  fundamentals,  but 
T  will  oft'er  a  few  suggestions  on  three  of  the  most  impor- 
tant factors  to  be  considered,  that  is,  crops,  money  and  for- 
eign trade. 

Crops. 

The  products  of  the  soil  is  the  most  important  of  all  our 
fundamental  factors,  for  upon  our  ability  to  produce  com- 
modities for  our  own  uses,  and  to  sell  for  export,  money 
conditions,  foreign  trade  balances  and  other  factors  are 
largely  dependent.  In  examining  this  phase  of  the  ques- 
tion we  can  easily  arrive  at  the  probable  production  of  min- 
erals or  other  products  not  affected  seriously  by  climatic 
changes,  but  the  agiicultural  products  require  more  care- 
ful attention.  A  large  acreage  does  not  insure  a  large  yield. 
We  had  a  striking  example  of  this  in  the  spring  wheat  crop 
of  1910.  Acreage  was  the  largest  on  record  but  in  the  month 
of  July  the  condition  of  the  growing  ci-ops  suffered  so  se- 
verely from  drought,  that  a  very  small  crop  was  harvested. 
Such  a  calamitv  could  not  be  foreseen,  l)ut  fortimatelv  such 
acute  changes  are  rare  and  may  be  classed  as  accidents. 

In  most  cases  we  can  get  a  fair  idea  of  the  probable  crops 
some  time  before  they  are  harvested.  Looking  at  this  year's 
prospects  for  spring  wheat  we  may  begin  our  study  in  the 
following  manner:  The  fall  of  1910  was  a  dry  period  in 
the  Northwest.  Therefore  we  mav  reasonablv  assume  that 
the  soil  did  not  store  up  a  sufficient  amount  of  surplus 
moisture  and  that  hea^y  rainfall  would  be  necessary  to 
make  a  good  crop  in  1911.  The  spring  of  1911  was 
an  ideal  one  for  planting,  however,  and  too  much  mois- 
ture in  the  ground  in  the  planting  ]>eriod  is  not  necessaiy 
or  desirable.  Under  such  conditions  the  plant  fakes  on 
a  rapid  growth,  greatly  accelerated  by  periods  of  sun- 
shine. The  roots  of  the  plant  do  not  find  it  necessary  to 
go  down  for  moisture  hut  spread  out  over  the  ground  and 


240  THOMAS  GIBSON 

the  stand  is  poor.  If  a  j)criod  of  dnnicss  follows  you  can 
pull  up  liaudfuls  of  the  stalks  with  no  physical  effort.  The 
best  crops  are  made  when  the  roots  are  deep  and  when  suffi- 
cient rainfall  follows  to  nourish  the  j^lant.  Therefore  our 
spring  wheat  crop  of  1911  was  well  started  but  was  depend- 
ent upon  a  heavy  rainfall  for  a  time.  By  keepiui^  a  close 
watch  of  the  developments,  we  can  arrive  at  a  fair  estimate 
of  the  outcome  long  before  the  crop  is  harvested. 

In  examining  the  crop  reports  of  the  government  or 
private  documents,  we  must  not  be  discouraged  because  cer- 
tain months  show  a  decline  in  conditions  or  a  certain  amount 
of  abandoned  acreage.  The  start  is  almost  invariably  bet- 
ter than  the  finish.  The  Department  of  Agriculture  will 
this  year  adopt  the  method  of  allo^\ing  for  normal  dete- 
rioration in  expressing  quantitative  estimates  of  production, 
and  this  will  simplify  the  mattter  somewhat.  We  should 
also  take  into  consideration  the  fact  that  a  too  favoral)le 
showing  in  the  first  reports  is  not  a  good  thing.  This  is 
particularly  true  of  cotton.  In  the  last  twenty  years  we 
have  only  twice  started  the  cotton  season  wih  a  June  condi- 
tion as  high  as  90.  In  1896  the  June  condition  was  97.2  and 
in  1902  it  was  95.1.  On  both  occasions  the  crop  was  a  fail- 
ure. The  condition  at  harvest  in  1896  was  60.7,  and  in  1902, 
58.3.  On  the  other  hand  the  lowest  June  conditions  in 
twenty  years  were  in  1903,  1905  and  1907,  and  in  each  in- 
stance the  condition  at  harvest  was  higher  than  in  cither 
1896  or  1902.  Our  greatest  crops  (1904,  1906  and  190S) 
were  made  on  a  rlune  c(>ndition  of  83.0,  84.6  and  79.7,  respec- 
tivelv.  From  80  to  85  mav  be  considered  the  safest  and 
most  normal  June  condition. 

In  estimating  the  probable  effect  upon  security  prices 
of  large  or  small  crcjps,  we  should  give  particular  attention 
to  the  sujiply  and  demand  of  the  world.  A  large  crop  at 
home  and  a  short  crop  in  countries  which  import  our  food- 
stuffs or  cotton  makes  for  greater  demand  and  consequently 
higher  prices  for  our  exportable   surplus.    This   in  tuni 


FUNDAMENTALS  AND  SECURITY  PRICES    241 

means  larger  trade  balances  and  better  money  conditions, 
and  better  money  conditions  work  in  favor  of  higher  se- 
curity prices. 

The  use  of  fertilizers,  the  ravages  of  insects  and  other 
factors  will  require  attention,  but  the  task  is  not  so  formid- 
able as  it  may  appear.  The  Government  furnishes  for  the 
asking  a  great  deal  of  competent  literature  on  the  subject, 
and  the  reports  of  railroad  corporations  and  individuals 
are  freely  published  in  trade  organs  and  the  daily  press. 
What  must  be  studiously  avoided  is  the  tendency  to  take  too 
much  for  granted.  Every  year  we  have  a  batch  of  good  and 
bad  reports  from  interested  people  who  misrepresent  pros- 
pects or  conditions  in  order  to  further  personal  aims,  but  a 
comprehensive  examination  of  the  su])ject  will  easily  en- 
able us  to  separate  the  true  from  the  false  and  the  reason- 
able from  the  unreasonable. 

Money. 

Money  conditions  represent  one  of  the  greatest  funda- 
mental factors.  In  applying  money  conditions  and  pros- 
pects to  the  probable  course  of  security  movements,  we  find 
many  phenomena  which  are  easily  read  and  which  are 
almost  certain  in  their  effects.  I  will  not  attempt  to  pass 
on  the  merits  or  demerits  of  our  miserable  currency  system, 
or  to  discuss  the  numerous  cures  suggested,  but  will  touch 
briefly  on  the  broader  influences  which  are  easily  examined. 

Interest  rates  show  seasonable  variations  because  of  the 
plethora  of  money  in  certain  seasons  and  the  demand  for 
money  in  other  seasons.  The  trend  of  interest  rates  in  De- 
cember is  usually  upward  throughout  that  month  and  dur- 
ing the  first  week  or  ten  days  of  January.  They  then  tend 
rapidly  downward  until  near  the  first  of  March.  This  is 
due  to  the  fact  that  money  becomes  tighter  in  December  in 
preparation  for  our  great  cash  January  disbursements  in 
interest  and  dividends  on  bonds,  notes  and  stocks.  This 
money,  being  distributed,  finds  its  way  back  into  the  banks 

B.VII— 16 


242  THOMAS  GIBSON 

or  tlic  market,  and  lower  interest  rates  follow.  ^loney 
usually  advances  more  rapidly  from  the  middle  of  June  un- 
til the  last  of  September  than  at  any  other  period  of  the 
year.  This  is  also  due,  but  only  in  part,  to  the  i)reparation 
for  July  disbursements  for  interest  and  dividends.  More 
importaiit,  hnwovci-,  is  the  demand  tlirouglutut  tlic  months 
of  duly,  Au^nst  and  September  for  crop-movini!:  purposes 
and  the  i)ayment  of  farm  oblifi:ations.  Tn  December  we  fre- 
quently find  an  advancing  security  market  in  connection 
with  higher  money  rates.  This  represents  the  anteriority 
of  stock  prices.  Speculators  know  that  money  will  soon 
flow  back  not  only  into  the  banks,  but  into  securities,  and 
they  will  buy  in  anticii)ation  of  such  a  rise.  Also  we  find 
frequently  an  advancing  trend  in  the  three  months  of  high- 
est money  rates,  for  our  crop  j^rospects  are  then  pretty  well 
established  and  if  they  are  good,  we  can  afford  to  i»ay  high 
rates  for  fluids  to  be  employed  in  speculative  ventures,  be- 
cause of  the  promise  of  higher  security  prices  in  the  future. 

We  cannot  safely  argue,  therefore,  that  an  advancing 
market  is  improbal)le  in  a  period  of  high  or  advancing  rates 
for  money.  Nor  can  we  consider  low  or  declining  rates  a 
sufficient  reason  for  higher  security  jirices.  A  plethora  of 
money  may  spell  stagnation  in  general  business  and  lack  of 
contidcncc  in  future  progress.  There  arc  certain  indica- 
tions, however,  which  will  greatly  aid  us  in  anixiiig  at  I'ca- 
sonablv  correct  conclusions.    1  will  mention  two  of  them. 

By  constant  examination  of  the  percentage  of  loans  to 
deposits  and  of  specie  to  loans,  we  may  easily  determine 
when  we  are  on  safe  or  dangerous  groinid.  We  nuist  look 
at  both  phases  of  this  factor.  If  the  percentage  of  loans  to 
deposits  is  iniduly  high,  this  condition  may  be  mitigated  by 
a  cori'espondingly  lii^h  ]>crcc7itnLre  of  s]ieci(^  to  loans  or, 
(•11  the  otlicr  hand,  if  tlic  percentage  dt'  loans  to  deposits  does 
not  a]i])ear  undnly  high  l)ut  the  ]iereentage  of  specie  to  loans 
is  very  low,  we  may  be  in  a  dangerous  position.  It  is  when 
the  two  spread  apart— when  loans  go  up  and  specie  falls— 


FUNDAMENTALS  AND  SECURITY  PRICES    243 

that  the  worst  condition  is  indicated.  In  1907,  I  caHed  at- 
tention to  this  factor  and  the  danger  from  the  conditions 
which  then  existed,  not  hesitating  to  predict  a  great  decline 
in  security  ]'>rices  as  the  result.  In  an  article  published  in 
February,  1907, 1  drew  the  following  conclusions : 

"In  order  to  illustrate  the  importance  of  the  money 
situation  and  the  tidelitv  with  Avhich  market  movements 
have  followed  monetary  conditions,  the  following  records 
are  set  forth,  covering  important  movements  of  i-ecent  years. 

*'In  1890,  twenty  stocks  listed  on  the  New  York  Stock 
Exchange  were  selling  at  an  average  price  of  about  $87  per 
share.  The  j^ercentage  of  loans  to  deposits  was  about  95 
per  cent  and  the  percentage  of  specie  to  loans  a])out  20  per 
cent.  In  November  of  that  year,  loans  advanced  to  102  per 
cent  as  compared  with  deposits,  and  specie  declined  to  about 
18  per  cent  of  loans.  The  stocks  mentioned  declined  to  an 
average  price  of  $64  per  share  and  later  in  1901  to  about 
$61  per  share.  From  1891  to  1893,  there  was  some  alter- 
nate improvements  and  retrogression  in  money  conditions, 
all  of  which  was  accurately  reflected  in  stock  prices. 

"In  1893,  the  proportion  of  loans  to  deposits  rose  to 
about  109  per  cent  and  the  proportion  of  specie  to  loans  de- 
clined to  13  per  cent.  The  average  price  of  the  twenty 
stocks  reached  about  $47  per  share.    (The  panic  of  1893.) 

"In  1894,  the  proportion  of  loans  to  deposits  fell  to  80 
per  cent  and  specie  to  loans  rose  to  30  per  cent.  This  was 
due  to  the  liquidation  of  1893.  Stock  prices  showed  some 
betteiTiient,  rising  to  about  $57  per  share.  The  severe  drub- 
bing of  1893  had  made  public  investors  nervous  and  had 
in  many  cases  incapacitated  them  for  stock  mni'kct  oprra- 
tions.    That  was  to  come  later. 

"In  1896,  the  pTo]V)rtimi  of  loans  to  deposits  rose  to 
102  per  cent,  and  specie  to  loans  fell  to  10  per  cent.  Stocks 
reached  their  lowest  level  in  July  of  this  year  ($42  per  share 
for  the  20  stocks  mentioned).  j 

"From  1896  to  1898,  a  gradual  improvement  was  ap- 


244  THOMAS  GIBSON 

parent.  Through  all  this  period  stock  prices  faithfully  re- 
flected money  conditions.  In  July,  1897,  the  proportion  of 
specie  to  loans  rose  to  30  per  cent  and  loans  to  deposits  fell 
to  83  per  cent.  Stocks  began  advancing,  and  in  March,  1899, 
the  average  price  (^f  the  20  stocks  considered  was  about  $^5 
per  share. 

"Tu  June,  1900,  the  average  price  of  the  twenty  stocks 
considered  was  about  $75  per  share.  The  proportion  of 
specie  to  loans  was  about  22  per  cent  and  the  propoi-tion 
of  loans  to  deposits  about  90  per  cent.  From  January,  1901, 
until  September,  1902,  money  conditions  did  not  improve, 
but  stocks  continued  to  advance.  There  were  large  crops, 
and  a  general  wave  of  expansion  and  prosperity  swept  the 
country.  In  September,  1902,  the  proportion  of  loans  to 
deposits  was  99  per  cent  and  the  proportion  of  specie  to 
loans  about  17  per  cent.  ]\rean while  stocks  were  high— 
$128  per  share  for  our  twenty  stocks.  Conditions,  though 
temporarily  ignored,  asserted  themselves  in  1903,  and  in 
September  of  that  year  the  average  price  of  the  twenty 
stocks  was  about  $88  per  share ;  the  percentage  of  loans  to 
deposits  was  101  per  cent  and  specie  to  loans  19  per  cent. 
The  money  situation  had  not  changed  materially,  but  the 
stock  market  was  making  a  deferred  pa^nnent. 

*'In  August,  1904,  the  proportion  of  loans  to  deposits  had 
fallen  to  90  per  cent  and  specie  to  loans  had  risen  to  25  per 
cent.  The  stock  market  was  steadily  advancing,  and  in 
January,  1906,  stocks  reached  their  pinnacle— $138  per 
share  for  the  twenty  securities  considered. 

"And  this  brings  us  down  to  January,  1907.  The  pro- 
poi*tion  of  loans  to  deposits  is  about  102  per  cent.  The  ]n'o- 
])ortion  of  specie  to  loans  is  about  17  per  cent. 

"The  average  ]-)rice  of  our  twenty  stocks  is  about  $130 
per  share. 

"What  is  the  use  of  talking  about  a  bull  market,  a 
'Spring  rise'  or  manipulation  in  the  face  of  such  conditions 
as  this?" 


FUNDAMENTALS  AND  SECURITY  PRICES    245 

The  other  point  referred  to  is  the  income  yield  on  sea- 
soned securities  at  different  stages  of  the  market.  Every 
advance  in  prices  cuts  down  the  yield  and  every  decline  in 
prices  increases  the  yield  so  long  as  the  rate  of  dividend 
remains  unchanged.  Stock  prices  went  so  high  in  the  latter 
part  of  1906  that  the  average  return  on  a  number  of  stand- 
ard dividend-paying  securities  was  reduced  to  about  3J 
per  cent.  In  the  panic  of  1907,  prices  went  so  low  that  these 
same  stocks,  with  no  change  in  dividend  rates,  showed  a 
return  of  7  per  cent  on  money  invested.  It  was  not  difficult 
to  determine  that  stocks  were  too  high  in  the  former  pei'iod 
and  too  low  in  the  latter  period.  In  the  first  case,  money 
was  worth  more  than  3  per  cent  in  all  lines  of  business ;  in 
the  latter  case,  it  was  worth  less  than  7  per  cent.  The  con- 
clusion w^as  obvious,  yet  so  prone  are  public  speculators 
and  investors  to  become  elated  in  boom  periods  and  de- 
pressed in  panic  periods,  that  this  glaring  evidence  of  what 
would  happen  later  was  lost  sight  of  or  disregarded.  I  will 
offer  the  opinion  that  in  normal  times,  seasoned  securities 
should  return  about  5  per  cent  or  midway  between  the  two 
extremes  cited  above.* 

Our  Foreign  Trade. 

Our  imports  and  exports  of  merchandise  are  an  impor- 
tant factor  bearing  on  prosperity  and  consequently  on  se- 
curity prices.  In  periods  of  prosperity  and  inflation  we 
become  wasteful,  careless  and  extravagant.  Our  imports 
rise  and  our  exports  fall  and  the  net  balance  shrinks.  This 
must  be  corrected  before  we  are  again  in  a  normal  trade 
position. 

In  examining  the  progress  of  our  trade  balances  we  will 
find  that  we  are  steadily  inidergoing  a  change  in  the  char- 
acter of  our  exports.  Our  shipments  of  foodstuffs  decrease 
or  at  least  do  not  increase  in  ratio  to  our  growth  of  popula- 
tion and  production.     Cotton  is  now  the  only  important 


*  The  rate  of  return  on  these  selected  securities  now  averages  5.40  per  cent. 


246  THOMAS  GIBSON 

agrieultunil  i^roduct  which  shows  a  steady  increase  in  our 
exports  .171(1  this  is  partly  due  to  a  steady  advance  in  the 
avera^c^  })rice  secured  for  the  staple.  Twenty  years  ago 
cotfnii  made  up  less  than  20  per  cent  (in  dollars)  of  our 
nierchaudisc  ('.\])(>rts;  ten  years  ago  it  made  up  about  24 
per  cent  and  in  IDIO  about  29  })er  cent.  Cotton  is  our  big 
*' money  crop." 

But  in  this  failing  off  of  our  exportable  surplus  of  most 
agricultural  products  there  is  nothing  to  be  alarmed  about. 
Our  exports  of  manufactured  and  partly  manufactured 
goods  grow  rapidly  to  fill  the  gap.  That  is  the  history  of 
all  new  countries.  At  first  they  l)egin  to  exchange  their  raw 
materials  for  such  manufactured  goods  as  are  required  and 
gradually,  as  population  and  facilities  grow,  to  consume 
raw  materials  and  to  produce  manufactured  goods  for  do- 
mestic use  or  for  sale.  It  would  not  be  at  all  inimical  to  our 
progress  or  prosperity  if  we  gradually  come  to  a  point  where 
we  actually  import  foodstuffs  or  textiles  for  our  own  needs. 

As  has  been  stated,  I  realize  the  impossibility  of  setting 
f(trth,  in  a  limited  space,  anything  definite  or  comprehen- 
sive on  so  great  a  subject  as  the  study  of  fundamentals.  All 
I  have  hoped  to  do  is  to  offer  suggestions  which  will  start 
the  student  in  the  right  path  and  to  point  out  some  of  the 
most  common  fallacies  in  regard  to  the  most  important 
basic  factors.  It  may  appear  that  the  subject  is  too  broad 
and  complicated  to  be  successfully  undertaken  except  as 
an  exclusive  study,  but  I  do  not  believe  this  is  the  case.  One 
I'xamination  will  lead  to  another,  the  confusing  problems 
will  be  ra])idly  cleared  up,  the  study  will  ])e  found  most  in- 
teresting and  profital)le  and  in  a  short  time  the  man  who 
devotes  a  little  time  each  day  to  the  intelligent  examination 
of  those  factors  will  find  himself  abreast  of  the  tim(\s  and 
his  general  conception  of  business  affairs  greatly  broad- 
ened. 


FUNDAMENTALS  AND  SECURITY  PRICES    247 

Extracts  From  an  Address  by  Thomas  Gibson  on  the  Stand- 
ard Oil  Decision  Before  the  Finance  Forum  of  New  York. 

Personally  my  chief  interest  in  the  Standard  Oil  decision 
is  as  to  its  bearing  on  security  values  and  prices.  Dur- 
ing the  last  few  days  I  have  frequently  heard  the  statement 
from  those  interested  in  security  price  movements,  that 
the  importance  of  the  ruling  marketwise  was  overestimated. 
In  my  opinion  it  is  underestimated.  Tlie  question  of 
the  final  construction  of  the  Sherman  law  has  acted 
as  a  depressing  and  repressing  influence  on  all  lines  of 
business  activity  for  a  long  time.  The  opinion  has  been 
offered  at  times  by  men  whose  utterances  command 
respectful  attention  that  a  strict  interpretation  of  the 
Shemian  act  would  be  revolutionary  in  its  effects  on 
business;  we  have  been  told  that  there  was  a  possibility, 
or  even  a  probability,  that  general  business  disruption  and 
practical  confiscation  would  follow  the  handing  down  of  the 
Standard  Oil  and  American  Tobacco  decisions.  The  rulings 
of  the  Court  in  the  Standard  Oil  case  prove  that  these 
fears  were  not  justified. 

So  great  has  been  the  apprehension  from  this  cause  that 
important  projects  have  been  delayed  or  abandoned,  and 
even  in  cases  where  promoters  or  capitalists  had  confidence 
in  the  sanity  and  integrity  of  our  greatest  judicial  body, 
the  lurking  fear  has  been  present  that  through  the  neces- 
sity of  a  strict  construction  of  the  letter  of  the  law,  a  serious 
condition  would  arise.  In  the  stock  market  a  great  many 
people  who  had  mon(\v  to  invest  and  who  were  satisfied 
Avith  fundamental  conditions  and  future  promise  have  re- 
frained from  entering  the  market.  A  still  greater  numlier 
who  were  confident  that  no  measure  whieh  aimed  at  the 
life  of  business  coml^inations  could  endure,  have  defeiTcd 
purchases  in  the  belief  that  the  temporary  effects  of  ad- 
verse findings  would  give  them  an  opportunity  to  buy  at 
lower  prices.    Still  others  have  considered  it  no  worse  than 


248  THOMAS  GIBSON 

an  eiTor  on  the  side  of  prudence  to  await  the  outcome,  even 
if  such  delay  meant  that  they  must  pay  somewhat  higher 
prices  for  their  prospective  purchases. 

The  recent  depression  in  general  business  has  been  due 
partly  to  this  waiting  attitude  and  partly  to  natural  and 
basic  causes.  The  two  combined  have  caused  unusual  un- 
certainty, and  consequently,  unusual  caution.  The  effect 
has  been  most  keenly  felt  in  the  securities  markets.  That 
part  of  the  depression  which  was  due  to  basic  causes  would 
not  have  exercised  so  gi*eat  an  effect  on  speculative  ven- 
tures, for  Wall  Street  always  looks  ahead  of  present  condi- 
tions and  discoTuits  the  future.  Periods  of  business  de- 
pression or  activity  are  always  reflected  in  stock  prices  long 
before  they  appear.  Thus,  1907  was  a  banner  year  in  gen- 
eral business  and  a  panic  year  in  the  stock  market,  and 
1908  was  a  year  of  advancing  prices  and  business  depres- 
sion. "We  can  foresee  the  probable  future  of  business  with 
some  degree  of  accuracy,  but  it  would  be  paradoxical  to  say 
that  we  could  foresee  an  uncertainty. 

In  my  opinion  this  uncertainty  is  now  at  an  end,  at 
least  for  some  time  to  come.  So  great  has  been  the  disturb- 
ing influence  of  the  pending  interpretation  of  the  law  that 
the  study  of  basic  conditions  and  prospects  has  been 
neglected  or  confused.  We  can  now  look  with  a  clearer 
vision  and  a  broader  perspective  at  such  things  as  crop 
prospects,  money  conditions,  and  other  fundamentals  which 
always  go  to  make  for  prosperity  or  depression.  If  we  had 
been  compelled  to  await  the  Supreme  Court  rulings  until 
fall,  it  would  have  been  a  bad  thing,  for  a  great  many  peo^^le 
would  have  argued  somewhat  as  follows: 

"Yes,  we  And  crop  prospects  excellent;  we  are  satisfied 

with  the  material  progress  and  conditions  of  the  country, 

but  we  are  afraid  of  the  Shennan  law.    We  cannot  measure 

or  even  sunnise  its  nature  or  its  effect. '* 

»#*#*♦♦ 


FUNDAMENTALS  AND  SECURITY  PRICES    249 

A  layman  necessarily  looks  at  the  Standard  Oil  decision 
in  a  very  different  light  from  what  a  lawyer  does.  As  it 
appears  to  me  the  meaning  is  about  as  follows : 

A  corporation  or  combination  of  capital  which  by  auto- 
cratic and  high-handed  methods  crushes  out  competition 
and  gains  practical  or  absolute  control  of  a  certain  commod- 
ity and  thus  obtains  power  to  arbitrarily  fix  prices  and  stiHe 
competition,  is  inimical  to  the  interests  of  the  people  and  is 
amenable  to  the  punishment  provided  under  this  act.  But 
a  corporation  or  combination  of  capital  which  combines  for 
the  purpose  of  increasing  administrative  and  operating  effi- 
ciency and  by  so  doing  effects  economies  or  gains  facilities 
which  permit  it  to  undersell  competitors  who  employ  an- 
tiquated methods,  is  for  the  benefit  of  the  people  and  does 
not  come  within  the  law.  The  mere  reading  of  the  w^ord 
"reasonable"  into  the  law  is  vigorously  objected  to  by 
manv  lawvers,  but  this  criticism  must  be  based  on  technical 
grounds  alone.  No  one  can  object  to  the  word  itself  in  any 
connection.  I  am  not  competent  to  express  an  opinion  as 
to  whether  or  not  such  decisions  should  be  construed  liter- 
ally and  upon  the  evidence  of  innocence  or  guilt  alone, 
without  reference  to  the  infentton  of  the  law,  l)ut  in  accept- 
ing the  findings  of  the  Supreme  Court  in  this  or  any  other 
case,  it  appears  to  me  that  we  should  be  content  with  the 
fact  that  such  rulings  represent  the  consensus  of  opinion 
formed  after  mature  deliberation  bv  our  hiiihest  tribunal. 
No  citizen  has  a  right  to  impute  motives  to  the  Supreme 
Court;  no  one,  at  least  no  layman,  has  a  right  to  reOect 
upon  the  legal  ability  of  its  members.  Our  Chief  Executive 
is  also  in  accord  with  the  si)irit  of  this  decision  as  is  evi- 
denced by  a  full  reading  of  his  message  of  January,  1910.* 


*  This  statement  was  questioned  by  the  audience,  but  was  fully  supportea 
by  quoting  extracts  from  President  Taft's  rnessage  of  January.  1910.  A  single 
paragraph  from  that  message  had  been  widely  quoted  by  the  press,  which, 
standing  alone,  put  the  President  in  the  light  of  holding  opinions  at  variance 
with  the  recent  findings  of  the  Supreme  Court  in  the  Standard  Oil  ca«e.  A 
full  reading  of  the  message  will  show  absolutely  that  the  President  was  in 
complete  accord  with  the  court  findings. — T.  G. 


MARKET  MOVEMENTS  OF  SECURITIES. 

BY  GEORGE  GARR  HENRY. 

(Of    Salomon    &    Company,    Bankers,    New    York;    Former    Vice-President, 
Guaranty  Trust  Company,   New   York.] 

There  is  no  question  connected  with  the  investment  of 
money  more  important  than  the  ability  to  judge  whether 
general  market  conditions  are  favorable  for  the  purchase 
of  securities. 

After  learning  how  to  judge  the  value  of  every  foim  of 
investment,  a  man  may  still  be  unsuccessful  in  the  invest- 
ment of  money  unless  he  acquires  also  a  lirm  grasp  upon 
the  general  principles  which  control  the  price  movements 
of  securities.  By  this  it  is  not  meant  tliat  a  man  needs  to 
have  an  intimate  knowled2:e  of  technical  market  conditions 
wliereby  to  estimate  temporary  fluctuations  of  minor  im- 
portance, but  rather  that  he  should  have  clearly  in  mind 
the  causes  which  operate  to  produce  the  larger  swings  of 
prices.  If  an  investor  acquires  such  a  knowledge,  he  is 
enabled  to  take  advantage  of  large  price  movements  in  such 
a  way  as  materially  to  increase  his  income,  and,  at  the  same 
time,  avoid  carrying  upon  his  books  securities  which  may 
have  cost  much  more  than  their  current  market  quotations. 
If  he  can  recognize  tlie  indications  which  point  to  the  hc- 
ginning  of  a  pronounced  upward  swing  in  securities,  and  if 
he  can  equally  recognize  the  signs  which  indicate  that  the 
movement  has  culminated,  he  can  liquidate  the  securities 
which  he  bought  at  the  inc(>ption  of  the  rise  or  transfer 
them  to  some  short-term  issues  whose  near  aj'tproach  to 
maturity  will  render  them  stable  in  ]>ri(^e.  allowing  the 
downward  swing  to  proceed  without  disturbing  him.  It 
it  not  expected,  of  course,  that  the  average  business  man 
will  be  able  to  realize  completely  this  ideal  of  investment, 

250 


MARKET  MOVEMENTS  OF  SECURITIES      251 

but  it  is  hoped  that  the  following-  analysis  will  give  him  a 
clearer  conception  of  the  principles  involved. 

Broadly  speaking,  the  market  movements  of  all  nego- 
tiable securities  are  controlled  by  two  influences,  sometimes 
acting  in  opposition  to  each  other  and  sometimes  in  concert. 
One  of  these  influences  is  the  loaning  rate  of  free  capital ; 
the  other  is  the  general  condition  of  business.  A  low  rate 
of  interest  or  the  likelihood  of  low  rates  has  the  effect  of 
stinuilating  security  prices,  because  banks  and  other  money- 
lending  institutions  are  forced  into  the  investment  market 
when  they  cannot  loan  money  to  advantage.  Conversely, 
a  high  rate  of  interest  or  the  prospect  of  high  rates  has  the 
effect  of  depressing  prices,  because  banking  institutions  sell 
their  securities  in  order  to  lend  the  money  so  released.  The 
automatic  working  of  this  process  tends  to  produce  a  con- 
stant adjustment  between  the  yields  upon  free  and  invested 
capital.  When  money  rates  are  low,  securities  tend  to  ad- 
vance to  the  point  where  the  return  upon  them  is  no  greater 
than  that  derived  from  the  loaning  of  free  ciipital.  AVhen 
rates  are  high,  securities  tend  to  decline  to  a  point  where 
the  return  is  as  great.  This  exi:)lains  the  influence  of  the 
first  factor. 

The  other  factor  is  the  general  condition  of  business. 
Good  business  conditions,  or  the  promise  of  good  conditions, 
tend  to  advance  security  prices,  because  they  indicate  larger 
earnings  and  a  stronger  financial  condition.  Poor  business 
conditions,  or  an  unpromising  outlook,  have  the  reverse 
effect. 

The  larger  movements  of  security  prices  are  always  the 
resultant  of  the  interaction  of  these  two  forces.  When  they 
work  together  the  effect  is  irresistible,  as  when  low  in- 
terest rates  and  the  prospect  of  good  business  conditions 
occur  together,  or  when  hic:h  money  rates  occur  in  the  face 
of  an  indicated  falling  off  in  business  activity.  At  such 
times  all  classes  of  securities  swing  together.  For  the  most 
part,  however,  money  rates  and  business  conditions  are  op- 


252  GEORGE  GARR  HENRY 

posed  in  their  influence,  rates  being  low  when  business  is 
bad  and  Iiigh  when  business  is  good.  Usually  the  worse 
business  conditions  bect)ni(',  the  easier  money  grows;  while 
the  more  active  business  becomes,  the  higher  money  rates 
rise.  The  effect  of  this  antagonism  between  tlie  controlling 
causes  is  to  produce  movements  of  different  projoortions 
and  sometimes  in  different  directions  in  different  classes 
of  securities.  High-grade  bonds  may  be  declining,  middle- 
grade  bonds  remaining  stationary,  and  poor  bonds  advanc- 
ing, all  at  the  same  time.  This  serves  to  give  a  very  irreg- 
ular ai)i)earance  to  the  security  markets,  and  appears  to 
justify  the  widely  held  opinion  that  security  prices  are  a 
pure  matter  of  guesswork,  and  that  they  are  controlled  only 
by  manipulation  and  special  influences.  A  clear  conception 
of  the  nature  of  the  influences  which  are  always  silently 
at  work  reconciles  these  apparent  inconsistencies  and  makes 
it  plain  that  general  price  movements  are  determined  by 
laws  as  certain  in  their  operation  as  the  laws  of  nature. 

This  may  be  illustrated  by  a  single  example.  Let  us 
assume  that  interest  rates  are  low  and  business  conditions 
bad  with  prospect  of  still  lower  interest  rates  and  still  more 
unpromising  business  conditions.  "What  will  be  the  effect 
upon  different  classes  of  securities'?  High-grade  bonds, 
such  as  choice  municipals,  whose  safety  cannot  l)e  im- 
paired by  any  extent  of  depression  in  business,  will  ad- 
vance because  their  market  price  is  influenced  almost  wholly 
by  money  rates.  If  their  interest  is  certain  to  be  paid,  no 
matter  what  business  conditions  may  become,  they  cannot 
be  greatly  affected  by  a  reduction  of  earnings,  and  conse- 
quently the  influence  of  low  money  rates  is  left  to  act  prac- 
tically alone.  ]\liddle-grade  bonds,  such  as  second-class 
railroad  issues,  will  remain  almost  stationarv,  low  monev 
rates  tending  to  advance  their  price  and  the  fear  of  de- 
creased earnings  tending  to  depress  them.  The  lowest  grade 
of  bonds  and  stocks,  whose  margin  of  security  even  in  good 
times  is  not  very  great,  will  probably  suffer  in  price  be- 


I»IARKET  MOVEMENTS  OF  SECURITIES      253 

cause  the  fear  of  default  in  iuterest  and  of  reduction  in 
dividends  will  operate  much  more  strongly  than  the  mere 
stimulus  of  low  interest  rates.  Of  course,  securities  cannot 
be  clearly  separated  into  these  three  classes,  but  shade 
imperceptibly  into  one  another.  The  classification  is 
adopted  only  for  purposes  of  illustration. 

Up  to  this  point  we  have  been  concerned  merely  in  show- 
ing that  the  market  movements  of  negotiable  securities  are 
controlled  bv  the  influence  of  certain  factors.  A  more  im- 
portant  question  now  remains  to  be  considered,  viz. :  whether 
the  effect  of  these  two  influences  is  to  produce  general 
swings  in  prices  which  may  be  depended  upon  with  com- 
parative certainty,  and,  if  so,  what  indications  are  afforded 
to  the  investor  of  the  commencement  or  culmination  of  such 
a  movement.  The  answer  must  be  that  the  combined  effect 
of  the  two  influences  described  is  to  produce  definite  and 
regular  swings  in  prices,  and  that  the  indications  which 
define  the  movements  are  not  difficult  to  follow. 

A  general  survey  of  the  history  of  every  industrial  na- 
tion reveals  the  fact  that  business  conditions  undergo  alter- 
nate periods  of  prosperity  and  depression  extending  in 
clearly  defined  cycles  of  substantially  uniform  length.  By 
tracing  the  usual  course  of  interest  rates  and  of  business 
conditions  throughout  one  of  these  cycles,  a  general  idea 
can  be  formed  of  the  way  in  which  the  joint  influences 
operate  to  produce  price  movements.  To  what  extent  the 
course  of  iuterest  rates  is  a  cause  as  well  as  a  result  of 
changing  business  conditions,  we  shall  not  attempt  here  to 
estimate,  but  will  be  content  to  note  carefully  the  general 
course  which  rates  for  money  pursue  throughout  the  cycles. 
Immediately  after  a  financial  crisis,  which  usually  closes 
an  era  of  great  lousiness  prosperity,  money  rates  become 
abnoiTnallv  easv.  AVithin  a  few  months  from  the  climax 
of  the  crisis,  monev  accumulates  in  enormous  volume  in 
financial  centers.  This  is  caused  by  the  great  diminution 
of  busmess  activity  which  renders  unnecessary  a  large  part 


254  GEORGE  GARR  HENRY 

of  the  circulating  medium  that  was  formerly  required  to 
transact  the  greater  volume  of  ))usiness.     To  the  extent  to 
which  this  accumulation  of  money  merely  reflects  a  redun- 
dancy of  currency  as  distinguished  from  real  liquid  ci\]n- 
tal,  it  can  have  little  effect  in  encouraging  the  resuni])ti(»n 
of  business  activity.    As  time  passes,  however,  and  ect)no- 
mies  in  operation  commence  to  make  themselves  manifest, 
and  especially  as  waste  and  extravagance  are  curtailed,  the 
country  as  a  whole  commences  to  accunuilate  real  liquid 
capital ;  that  is  to  say,  its  total  production  leaves  a  surplus 
over  the  amount  of  consumption.    Tn  the  state  of  business 
feeling  which  has  been  pictured,  the  undertaking  of  new 
business  ventures  or  additions  to  existing  properties  would 
.      not  lie  approved,  so  that  the  surplus  wealth  created  finds  its 
way  into  bank  deposits  as  liquid  capital.    The  competitive 
attempt  to  loan  this  capital  at  a  time  when  borrowers  are 
few  produces  merely  nominal  interest  rates.    This  continues 
for  some  time.     It  is  only  graduall^v  as  confidence  returns 
and  as  the  spirit  of  initiative  begins  to  reassert  itself  that 
some  part  of  the  liquid  capital  created  each  year  is  diverted 
into  fixed  forms.    Here  and  there  some  enterprising  group 
of  men  will  develop  a  mine,  lay  a  new  piece  of  railway,  or 
make  some  addition  to  an  existing  undertaking.    For  some 
length  of  time,  however,  the  liquid  capital  of  the  country  not 
only  remains  unimpaired,   but  is   continually   increasing. 
After  a  time  a  change  comes.    The  annual  surplus  of  ])ro- 
duction,   tli(»iigh  larger  than  before,  is  only  sutlicient  to 
provide  for  the  new  undertakings  which  the  growing  op- 
timism demands.    Interest  rates  rise  moderately  in  resjionse 
to  the  added  demand  for  capital.    A  few  years  further  along, 
as  business  activity  increases  and  success  appears  plaiidy 
to  wait  upon  new  ventures,  the  demand  f(^r  new  c<apital  with 
which  to  develop  increased  facilities  and  new  enterprises 
exceeds  the  annual  supply  of  wealth  created.     Prosperity 
having  increased,  another  factor  commences  to  assert  itself. 
The   spirit  of  economy  and   thrift   which   had   prevailed 


MARKET  MOVEMENTS  OF  SECURITIES      255 

throughout  the  years  of  depression  gives  place  to  extrava- 
gance, tile  demand  for  luxuries,  and  other  unproductive 
forms  of  expenditure.  While  the  total  production  is  much 
greater  than  in  the  lean  years,  the  margin  of  production  is 
not  proportionately  as  great,  and  this  amount  is  insufficient 
to  meet  the  demands  upon  it.  The  supplies  of  liquid  capital 
stored  up  during  the  years  of  depression  are  resorted  to, 
and  they  serve  to  provide  the  new  capital  for  a  few  addi- 
tional years.  Interest  rates  at  once  reflect  the  encroachment 
upon  stored-up  capital,  and  their  rise  gives  the  first  real 
warning  of  the  country 's  true  position.  The  ojotimistic  busi- 
ness men  do  not  heed  the  warning.  After  exhausting  all 
the  real  capital  available  in  the  countrj^  they  proceed  to 
borrow  extensively  from  foreigners  or  from  government 
banks— in  this  countr}^  from  the  national  government 
through  bank  deposits.  Every  step  which  can  be  taken 
to  induce  foreigners  to  part  with  their  capital  is  resorted 
to.  Tf  foreigners  will  not  buy  long-term  bonds,  short-term 
notes  are  created.  If  the  foreigners  refuse  these,  they  are 
asked  to  make  loans  secured  by  the  new  bonds  and  notes. 
The  rates  of  interest  offered  are  so  attractive  that  consid- 
erable sums  are  usually  obtained,  and  the  pressure  of  busi- 
ness activitv  continues  further.    Finallv  the  dav  of  reckon- 

*  ft  V 

ing  arrives  when  some  incident,  usually  unimpiu'tant  in  it- 
self, first  suggests  to  the  lenders  of  money  that  their  debtors 
whom  they  know  to  be  overextended  may  not  be  able  to  pay 
their  loans.  The  attempt  to  collect  their  loans  produces  a 
financial  crisis  which  brings  to  an  end  the  period  of  pros- 
perity. 

The  foregoing  is  a  description  of  the  more  important 
stages  through  which  business  conditions  pass  from  crisis 
to  crisis.  Different  cycles  vary  in  particular  details,  but 
all  agree  in  essential  outlines.  Sometimes  special  influences 
are  at  work,  which  operate  to  shorten  or  prolong  the  cycle. 
The  approach  of  a  crisis  will  be  retarded  by  inflation  of 
the  currencv,  for  the  excess  finds  its  wav  into  bank  vaults 


256  GEORGE  GARR  HENRY. 

and  increases  the  volume  of  loanable  credit.  The  effect  of 
such  inflation,  however,  is  wholly  disastrous,  because  the 
addition  to  the  supply  of  capital  is  fictitious,  not  real,  and 
only  defers  the  day  of  reckoning  for  a  greater  catastrophe. 
On  the  other  hand,  the  approach  of  a  crisis  can  be  greatly 
hastened  by  wars,  conflagrations,  and  other  agencies  which 
destroy  capital,  and  by  attacks  upon  capital  and  the  con- 
duct of  corporate  business,  for  such  attacks  tend  to  render 
capital  timid  and  produce  the  same  effect  as  a  violent  cur- 
tailment of  the  supply.  These  are  only  some  of  the  many  in- 
fluences which  might  become  operative,  but  they  serve  to 
show  the  necessitv  for  careful  consideration  of  all  the  fac- 
tors  at  work  if  a  true  conception  of  the  condition  and  ten- 
dencies of  business  is  to  be  formed. 

From  the  general  account  given  above  of  the  successive 
phases  of  a  credit  cycle,  it  is  possible  to  summarize  the  course 
of  interest  rates  and  the  course  of  business  conditions, 
^loney  rates  become  suddenly  easy  after  a  crisis,  remain 
low  or  grow  easier  for  a  period  of  several  years,  and  then 
rise  continuously  until  the  next  crisis,  advancing  with  great 
rapidity  toward  the  close  of  the  cycle.  Business  conditions 
remain  poor  or  grow  worse  a  few  years  after  a  crisis.  Liqui- 
dation is  taking  place,  prices  are  going  down,  and  the  un- 
certainty of  the  outlook  causes  diminished  activity.  There- 
after, however,  conditions  improve  and  activity  increases 
with  fair  uniformity  until  it  reaches  the  high  tension  of  the 
period  immediately  preceding  the  crisis.  The  course  of  in- 
terest rates  and  the  course  of  business  conditions  may  both 
be  deflected  by  the  operation  of  special  influences,  but  the 
general  tendencies  are  substantially  as  outlined.  The  re- 
sult of  the  operation  of  these  joint  factors  may  be  traced 
in  the  mai'ket  movements  of  any  class  of  securitv  desired. 
Let  us  consider  their  effect  in  producing  the  market  swings 
of  the  highest  grade  of  investment  issues  and  of  the  lowest 
grade,  those  which  are  affected  only  by  money  rates  and 
those  which  are  affected  almost  whollv  bv  business  condi- 
tions. 


MARKET  MOVEMENTS  OF  SECURITIES      257 

Emerging  from  the  strain  of  the  crisis  at  their  lowest 
point,  high-gTade  bonds,  such  as  the  best  municipal  and 
railroad  issues,  advance  rapidly  as  interest  rates  decline, 
continuing  their  advancing  tendency  throughout  the  period 
of  business  depression  which  follows  upon  the  heels  of  the 
crisis.  As  business  conditions  improve,  their  position,  while 
perfectly  secure  before,  is  further  strengthened  and  an 
added  stimulus  is  given  to  their  rise.  About  the  middle  of 
the  cycle  when  the  business  outlook  is  very  promising,  and 
before  interest  rates  have  sustained  any  material  advance, 
the  prices  of  high-grade  bonds  are  usually  at  their  highest 
point.  From  that  time  forward  they  commence  to  decline, 
in  spite  of  the  increasing  prosperity  of  the  country,  under 
the  influence  of  rising  monev  rates.  Thev  make  their  lowest 
prices  in  the  midst  of  the  crisis,  when  the  strain  upon  capital 
is  greatest  and  the  outlook  for  business  most  unpromising. 

On  the  other  hand,  bonds  of  the  lowest  grade  (whose 
margin  of  securit}^  is  least),  do  not  commence  to  recover 
materially  in  price,  in  spite  of  the  influence  of  low  money 
rates  during  the  hard  times  which  follow  the  crisis,  the  in- 
fluence of  reduced  earnings  and  the  fear  of  default  of  in- 
terest holding  them  in  check.  As  the  outlook  becomes 
brighter,  tliey  advance  ra])idly  in  price  so  long  as  they  yield 
more  than  current  money  rates.  At  some  point,  difficult 
to  deteiTnine  in  advance  but  usually  well  along  toward  the 
end  of  the  cycle,  they  reach  their  high  point  and  thereafter 
decline  under  the  influence  of  the  growing  stringency  in 
money. 

Between  these  two  extremes,  every  class  of  secunty  is 
to  be  found.  The  better  ones  will  tend  to  resemble,  in  their 
market  movements,  the  course  pursued  by  the  choicest 
bonds;  the  poorer  ones  will  approximate  the  lowest  class. 
In  every  case,  however,  unless  special  influences  operate  to 
produce  variations,  the  market  swing  of  a  given  security 
should  be  easily  conjectured  by  an  investor  who  gives  care- 
ful attention  to  the  relative  weight  which  is  likely  to  attach 
to  each  determining  influence. 

.      B.VII— 17 


STOCKS  AND  THEIR  FEATURES— A  DIVISION   AND 

CLASSIFICATION.^ 

BY  JOHN  ADAMS,  JR.    PHILADELPHIA. 

In  the  followiii.2:  article  stock  ccrtiliciitcs  will  be  classified 
(1)  accord i  11  j;'  to  their  par  value,  (2)  according  to  the  con- 
ditions regarding  their  issue  (i.  e.,  Avhether  the  stock  is  full- 
paid  or  assessable),  and  (3)  according  to  the  rights  and 
limitations  attaching  to  common  and  preferred  stocks.  Fol- 
lowing this  threefold  classification  the  article  will  next 
discuss  debenture  stocks  and  those  stock  certificates  which 
are  analogous  to  preferred.  Emphasis  will  be  given  only 
to  such  stocks  as  are  listed  on  some  stock  exchange  in  the 
United  States,  though  at  times  it  will  be  necessarv  to  touch 
upon  shares  traded  in  elsewhere. 

In  the  first  place  stock  certific<ates  may  be  classified 
according  to  their  ]^ar  value.  The  great  majority  of  imiior- 
tant  railroad,  industrial  and  financial  corporations  have 
issued  stock  with  a  par  value  of  $100 ;  at  the  Siinie  time,  how- 
ever, some  of  the  best  railroad  stocks  in  the  ccnintry,  such 
as  the  Pennsylvania  Railroad,  Reading,  Delaware,  Lacka- 
wanna &  Western,  and  Lehigh  Valley,  have  a  par  value  of 
only  $50.  Among  the  largest  industrial  concerns  with  shares 
of  only  $50  par  may  be  mentioned  the  Westinghouse  Electric 
Company,  th(^  LTnited  Gas  Improvement  Company,  I^ehigh 
Coal  and  Navigation,  Pittsburg  Brewing,  and  Cambria  Steel. 
It  will  be  noticed  that  these  com])anies  are  mainly  incor- 
porated in  the  State  of  Pennsylvania,  and  it  may  be  said 
that  the  $50  share  for  railroads  and  industrials  is  largely 
local  to  the  Keystone  Stnte.  l^x;nn]»les  of  large  companies 
with  a  stock  of  this  par  value  incorporated  elsewhei-e  are 


•Courtesy  of  the    NimnU  of  thr  American  Academy  of  Political  and  Social 
Science 

258 


STOCKS  AND  THEIR  FEATURES  259 

extremely  few.  The  shares  of  two  or  three  unimportant 
railways  have  a  par  value  of  $25,  but  that  figure  is  found 
primarily  in  the  issues  of  Boston  "coppers,"  such  as  Ana- 
conda, Calumet  and  Hecla,  Old  Dominion,  Osceola,  Quincy, 
Tamarack,  Wolverine,  etc.  Generally  speaking,  these  are 
stocks  of  proved  value,  since  their  average  price  is  many 
times  the  figure  stamped  on  the  face  of  their  certificates. 
In  the  mining  field  we  also  find  a  large  number  of  lower 
par  values,  i.  e.,  in  multiples  of  five  dollars  and  even  one 
dollar  a  share  or  lower.  In  most  instances,  however,  these 
shares  represent  mining  concerns  which  are  traded  in  on  the 
curb  markets  or  on  the  exchanges  of  San  Francisco,  Salt 
Lake  City  or  Colorado  Springs. 

According  to  the  laws  of  most  states  any  par  value  what- 
ever may  be  fixed  for  the  stock.  Consequently  there  are 
par  values  all  the  way  from  one  cent,  in  certain  mining  and 
oil-well  properties,  to  a  few  banks  and  trust  companies, 
such  as  the  Humboldt  Savings  Bank,  and  the  Union  Trust 
Company  of  San  Francisco,  and  the  West  Side  Bank  of 
'^niwaukee,  each  with  shares  of  a  par  value  as  high  as  $1,000. 
The  New  Jersey  corporation  laws,  under  whose  fostering 
influence  most  large  industrials  have  been  incorporated, 
provide  that  any  par  value  whatever  may  be  chosen ;  but  it 
must  be  emphasized  that  the  vast  majority  of  stock  issues 
of  sufficient  importance  to  be  listed  on  a  large  exchange 
have  a  par  value  of  $100.  It  is  also  practically  the  universal 
rule  for  corporations  to  have  the  same  par  for  all  classes 
of  its  stock  where  there  is  more  than  one  issue.  Only  one 
exception  has  been  found  to  this  rule,  the  Northern  Com- 
mercial Company,  which  has  $1,622,800  of  common  stock 
witli  a  par  of  $100,  and  $1,620,000  preferred  stock  of  a  par 
value  of  only  five  dollars.  If  every  share  casts  one  vote, 
the  reason  for  the  difference  may  be  infevr<"(l. 

Some  stocks,  strange  as  it  may  seem,  have  no  par  value 
whatever.  Thus,  the  Great  Northeni  ore  propeii:ies  con- 
stitute a   trust  created   in   1006,   consisting  of  1,500,000 


260  JOHN  ADAMS 

^'trustees'  certificates  t)!"  Ijcncficial  interest,"  one  of  which 
was  given  to  every  share  of  the  Great  Northern  Railway 
Company  wlien  the  mineral  lands  of  that  corporation  were 
segregated.  The  Adams  Express  Company,  a  voluntary 
association,  dating  from  18r)4,  likewise  has  120,000  shares 
of  no  stipulated  par  value,  ])aying  dividends  of  eight  dollars 
per  share  annually.  Similarly,  the  East  Boston  Company, 
a  Massachusetts  corpoi-ation  going  back  to  1833,  has  IjIO.OOO 
shares  of  no  par  value ;  and  among  other  companies  which 
have  ad<)i)ted  this  plan  several  might  l)e  mentioned  which 
to  all  intents  and  purposes  have  given  theii*  stock  a  par 
value  of  $100,  though  a  "share"  of  no  par  value  whatever 
is  employed;!  e.,  the  Boston  and  Worcester  Electric  Com- 
panies and  the  Boston  Suburban  Electric,  each  with  pre- 
ferred stock  entitled  to  four  dollars  a  year  cumulative  divi- 
dends and  $100  in  case  of  dissolution. 

This  Massachusetts  idea,  if  we  may  so  term  it,  was  also 
applied  in  the  reorganization  plans  of  the  Chicago  Railways 
Company.  The  cajutal  stock  of  this  company  is  $100,000, 
which  is  used  as  a  basis  for  265,000  "participation  certif- 
icates" of  four  series:  The  first  of  30,800  ''parts,"  the 
second  of  124,300,  the  third  of  G0,000,  and  the  fourth 
of  50,000.  The  first  three  are  entitled,  in  order,  to  eight 
dollars  cumulative  dividends,  and  to  $100  on  dissolution. 
The  fourth  series  gets  the  surplus  dividends  aiid  capital. 
The  stocks  of  these  companies  thus  really  have  a  par  value 
of  $100  under  a  different  name — using  d(^llars  for  dividends 
instead  of  percentages,  and  allowing  the  preferred  $100  on 
dissolution.  The  reason  for  this  policy  may  be  found  in 
the  fact  that  shareholders  cannot  be  held  liable  up  to  the 
"par  value"  for  eorporation  debts,  as  is  the  case  in  some 
states;  and  again  when  the  capital  consists  of  "parts"  of 
no  par  value  there  may  exist  a  good  superficial  answer  to 
the  charge  of  "stock  watering." 

A  further  classification  of  stock  cei'tificates  can  be  made 
with  reference  to  their  issue;  i.  e.,  into  issued  and  outstand- 


STOCKS  AND  THEIR  FEATURES  261 

ing,  unissued,  and  treasury  stock.  Unissued  stock  is  that 
which  has  been  authorized  but  not  vet  disposed  of.  It 
merely  represents  the  right  to  admit  new  stockholders  and 
has  no  value  in  itself.  It  has  no  active  stock  rights  and  is  not 
an  asset  of  the  corporation.  It  usually  is  reserved  for  va- 
rious corporate  purposes,  such  as  the  conversion  of  bonds 
or  the  purchase  of  new  lines  or  plants.  Treasury  stock,  on 
the  other  hand,  is  best  described  bv  Wood  in  words  which 
have  been  frequently  quoted:  It  is  stock  "issued  and  out- 
standing which  has  come  into  the  possession  of  the  corpora- 
tion which  issued  it  by  purchase,  donation,  or  in  liquidation 
of  a  debt.  If  it  has  been  issued  full-paid  it  remains  so,  even 
if  sold  again  below  par,  and  it  is  considered  an  asset  of  the 
corporation  for  bookkeeping  purposes.  But  such  stock,  so 
long  as  it  is  held  by  the  corporation  or  its  representatives 
as  treasury  stock,  participates  neither  in  dividends  nor  in 
the  meetings  of  the  corporation  as  treasury  stock;  though 
it  still  represents  a  paid-for  interest  in  the  property  of  the 
corporation."  Treasury  stock  is  issued,  but  is  evidently 
not  outstanding.  Examples  most  frequently  occur  in  mi- 
ning companies,  though  there  the  term  is  usually  misap- 
plied, being  used  to  describe  unissued  stock  in  the  company's 
treasury.  Among  industrials  holding  a  considerable  amount 
of  treasury  stock  may  be  mentioned  the  United  States  Cast 
Iron  Pipe  and  Foundry  Company,  the  Pacific  Coast  Com- 
pany, the  American  Beet  Sugar  Company,  and  the  Pitts- 
burg Brewing  Company. 

Stocks  can  also  be  classified  according  to  whether  they 
are  full-paid  or  assessable.  Full-paid  stock  is  simply  that 
which  has  been  fully  paid  for  as  required  by  law  in  money, 
property  or  labor.  The  certificates  of  such  stocks  are  issued 
stamped  "full-paid  and  non-assessable,"  and.  in  the  absence 
of  any  special  statute  on  the  subject,  carry  with  them  no 
legal  liability.  Assessable  stock,  on  the  other  hand,  is  that 
which  has  not  been  fully  paid  for  by  its  subscriber.  Just 
as  Boston  is  the  home  of  many  mining  shares  with  a  par 


2G2  JOHN  ADAMS 

value  of  $25,  so  it  is  also  the  market  for  many  assessable 
shares.  Calumet  and  Hccla  stock  has  paid  in  only  $12  on 
a  par  Taluo  of  $25;  Franklin,  $10.20;  Tamarack,  $13;  Al- 
louez,  $22.25;  Wolverine,  $13;  etc.  Simihirly,  in  the  Metro- 
politan Securities  Comjiany,  one  of  the  constituent  cor])()ra- 
tions  of  the  Interborough-]\Ietropolitan  Company,  only  $75 
has  been  paid  in  on  a  par  of  $100 :  the  Philadel])hia  Electric 
Company,  only  $15  on  a  par  value  of  $25 ;  the  Union  Trac- 
tion Company  of  Philadelphia,  only  $17.50,  thoui^di  it  is 
now  receiving  a  guaranteed  dividend  of  6  per  cent  on  its 
$50  par  value.  It  should  be  emphasized,  however,  that  out- 
side of  mining  and  public  utility  corporations,  assessable 
shares  are  comparatively  few.  Very  few  instances  of  such 
stock  are  listed  on  the  New  York  Stock  Exchange.  The 
legal  status  of  assessable  stock  is  such  that  creditors  of  the 
corporation  can  hold  the  owners  of  the  shares  liable  for  the 
difference  between  the  amount  actually  paid  in  and  the  par 
value  of  the  stock. 

Turning  next  to  a  discussion  of  the  various  features  of 
common  and  preferred  st(^ck,  we  find  that  the  classification, 
to  be  complete,  must  be  very  elaborate.  An  outline  is  in- 
serted on  page  263  to  enable  the  reader  to  follow  more 
readily  the  following  classification. 

** Common  stock,"  meaning  the  junior  issue,  when  there 
is  preferred  stock,  or  stock  analogous  to  ])referred,  some- 
times has  a  real  preference  in  regard  to  voting,  for  there 
are  instances  where  the  preferred  gives  up  the  right  to  vote 
as  a  consideration  for  its  receiving  regular  dividends.  The 
usual  provision  is  that  if  such  disbursements  are  discon- 
tinued for  a  certain  period,  varying  with  the  individual 
coi-j-yoration,  the  preferred  stock  shall  resume  its  voting 
l^ower.  Leading  corporations  in  which  the  conuiion  stock 
has  exclusive  voting  power,  under  tlic  foi'cgoing  conditions, 
are  American  Smelters  Securities,  American  Tobacco,  In- 
terboroucrh-^fetropolitan,  Koyal  Baking  Powder,  and 
United  Cigar  ^fanufacturers'  Company.    All  of  them,  with 


STOCKS  AND  THEIR  FEATURES 


263 


the  exception  of  the  Iiiterboroiigh-Metropolitan  Company, 
have  maintained  reguhir  dividends ;  the  latter  defaulted  in 
its  obligations  toward  its  preferred  stock  in  1907,  so  that 
at  the  present  time  this  issue  has  full  voting  rights. 

CLASSIFICATIONS  OF  STOCK  CERTIFICATES  ACCORDING  TO  THE 

RIGHTS    AND    LIMITATIONS    ATTACHING    TO 

VARIOUS  TYPES  OF  STOCKS. 

1.  Common. 

2.  Deferred. 


Dividends  (always) 


3.  Preferred,  as  to       -< 


Assets 


Voting  power 


Otiier  features 


{ 


Cumulative  (industrials,  gener- 
ally). 

Non-cumulative  (railroads,  gen- 
erally). 

Railroads  (not  often). 
Industrials  (generally). 

Exclusive  (seldom). 
Special  (often). 


rCallable. 
<  Convertible. 
L  Participating. 


4.  Stocks  analogous  to  Preferred 


5.  Debenture. 


Interest-bearing. 
Special  stock. 
Guaranteed. 
Founders'. 


Common  stock  generally  has  the  right  to  receive  all  the 
surplus  remaining  for  dividends  after  tlic  i»ic4Vrred  has 
been  paid  its  stipulated  percentage;  and  in  a  growing  coun- 
try such  as  the  United  States  this  feature  is  vahial)k\  pro- 
vided there  is  any  worth  in  the  company.  The  Union  Pa- 
cific Railroad  common  receives  10  per  cent,  but  the  pre- 
ferred is  forever  limited  to  4  per  cent.  The  American  To- 
bacco Company  began  with  a  regular  6  per  cent  dividend 
on  the  pi-eferred  and  20  per  cent  on  the  common,  but  in- 
creased the  amount  paid  on  the  common  almost  annually, 


234  JOHN  ADAMS 

until  now  it  stands  at  35  per  cent.  These  two  companies  are 
exceptional,  but  there  are  scores  of  well-known  corp(jra- 
tions,  such  as  Atchison,  American  Light  and  Traction, 
American  Radiator,  American  Smiff.  II.  B.  Clatlin  Com- 
pany, Eastman  Kodak,  and  Philadelphia  Company,  to 
name  only  a  few,  where  the  common  receives  more,  and 
frequently  a  great  deal  more,  than  the  preferred.  It  is  to 
be  noted,  however,  that  in  some  cases  the  preferred  partici- 
pates in  the  surplus  left  after  dividends  of  a  certain  per- 
centage on  the  common  have  been  paid.  This  class  of  pre- 
ferred stock,  and  its  relation  to  the  junior  issues,  will  be 
treated  later  in  its  ajDpropriate  place.  It  is  evidently  not 
an  advantage  to  the  connnon  stock  to  have  such  jDreferred 
stock  ahead  of  it. 

Common  stock  usually  has  the  right  to  share  equally 
with  the  preferred  in  the  corporate  assets  on  the  dissolution 
of  the  company.  In  many  cases,  however,  especially  the 
New  Jersey  industrials,  which  include  practically  all  the 
large  "trusts,"  the  preferred  stock  has  a  preference  in  this 
respect.  It  is  evident  that  in  corporations  where  the  com- 
mon stock  receives  a  large  dividend,  as  those  named  in  the 
preceding  paragraph,  that  on  the  distribution  of  the  prop- 
erty producing  such  a  revenue  the  common  would  receive 
more  than  the  preferred.  Conversely,  if  the  company  were 
weak,  and  especially  if  preferred  dividends  were  in  default, 
it  is  easily  conceivable  that  the  conuuon  would  receive  little 
or  nothing,  as  in  the  latter  case  all  back  cunnilative  divi- 
dends ai'e  generally  treated  as  an  additional  part  of  the 
preferred  capitalization. 

"Deferi-ed"  stock  is  an  issue  commonly  used  in  England, 
but  only  infrequently  met  with  in  the  United  States.  The 
name  itself  is  largely  explanatory  of  its  nature.  It  is  an 
issue  on  which  dividends  are  deferred  until  dividends  on 
some  other  variety  of  stock,  or  interest  on  some  particular 
bonds,  have  been  paid.  The  common  stock  of  companies 
possessing  this  issue  is  usually  divided  into  two  parts— one, 


STOCKS  AND  THEIR  FEATURES  265 

the  "B,"  or  ordinary  stock,  and  the  deferred,  or  "A"  stock, 
which  receives  no  dividends  until  a  certain  fixed  rate  has 
been  paid  upon  the  "B"  stock.  Both  of  these  issues  are 
junior,  of  course,  to  the  "preference  stock,"  as  it  is  called 
in  England.  The  corporations  which  possess  this  class  of 
stocks  are  usually  English  either  in  their  inception,  location 
or  management.  In  this  country  we  may  mention  Arizona 
Copper,  and  the  Alabama,  New  Orleans,  Texas  &  Pacific 
Junction  Railways,  Limited,  as  examples.  The  old  Alabama 
Great  Southern  Railroad,  which  has  merged  into  an  Amei-- 
ican  company  of  the  same  name  in  1906,  and  the  National 
Railroad  of  Mexico,  merged  with  the  Mexican  Central  in 
1908  into  the  National  Railways  Company  of  Mexico,  both 
possessed  this  feature.  None  of  these  issues,  however,  has 
ever  been  of  importance  on  the  stock  exchange. 

Having  explained  the  nature  of  deferred  stock,  we  may 
now  consider  preferred  stock.  This  class  may  have  a 
preference  in  any  one,  any  two,  or  all  three,  of  three  parti- 
culars; i.  e.,  dividends,  always;  assets,  generally;  and  voting 
power,  at  times.  It  may  also  be  ''callable,"  ''convertible," 
or  "participating." 

Such  stock  always  has  a  preference  over  the  conmion  as 
regards  dividends,  which  may  be  either  "cumulative,"  or 
"non-cumulative,"  the  former  being  in  the  nature  of  a  fixed 
charge,  because  if  the  corporation  is  unable  to  pay  the  divi- 
dend in  one  year,  it  must  l)c  paid  in  succeeding  years,  to- 
gether with  the  dividends  for  those  years,  before  the  com- 
mon can  receive  an^-tliing.  No  such  duty  attaches  to  non- 
cumulative  stock.  If  the  dividend  cannot  be  paid  this  year, 
the  rights  of  the  common  to  share  in  next  year's  earnings 
are  in  nowise  impaired.  "Railroads  are  non-cunuilative, 
industrials  generally  ciunulative,"  so  runs  the  rough-and- 
ready  distinction.  It  is  not  exact,  since,  as  the  accompany- 
ing table  shows,  there  are  numerous  railroads  that  have  a 
cumulative  dividend  feature  in  their  preferred  stock  issue: 

It  is  of  importance  to  notice  that  of  late  it  seems  cus- 


266  JOHN  ADAMS 

Amount  of 
Name.  Preferred  Stock     Cumulative  Remarks. 

Outstanding.  Rate. 

Allegheny   Valley    ?17, 174,000  3%  Mostly    exchanged    for 

Pennsylvania    R.     R. 
stock. 

Central  Pacific   1.1. 600,000  4% 

Chicago  &  Alton  879,300  4%  "Prior    lien     and     par- 

ticipating stock." 

Cincinnati,    New    Orleans    & 
Texas  Pacilic    2,453,400  5% 

Rutland    9,057,600  7%  About  180%  in  arrears. 

tomary  in  railroad  leorgaiiizations  to  insert  a  cunnilative 
clause  for  the  preferred  stock  in  the  new  charter.  But  divi- 
dends do  not  become  cunnilative  for  a  few  years,  in  order 
to  give  the  road  an  opportunity  to  become  firmly  esta))lished 
before  it  must  meet  the  fixed  cumulative  dividend  obliga- 
tion. Pcre  Marquette  first  preferred  stock,  to  the  extent  of 
over  eleven  millions,  became  a  4  per  cent  cumulative  issue 
after  June,  1911;  Chicago  Great  Western  preferred,  over 
forty-one  millions,  is  to  be  4  per  cent  cumulative  after  June, 
1914;  the  Seaboard  Company,  the  holding  corporation  for 
the  Seaboard  Air  Line,  gave  5  per  cent  cumulative  divi- 
dends, after  July,  1910,  on  its  issue  of  over  six  millions 
of  first  preferred.  In  fact,  there  is  over  $150,000,000  of 
preferred  railway  capital  that  is  now,  or  soon  will  be,  re- 
ceiving cumulative  dividends.  But  this  amount,  large  as  it 
may  seem,  is  relatively  small,  comjiared  with  the  total  of 
more  than  $1,500,000,000  of  preferred  stock  of  Anu'rican 
railroads  outstanding. 

The  general  rule  referred  to  a  moment  ago  is  correct  in 
stating  that  industrial  preferred  stock  issues  are  generally 
cumulative,  since  about  two-thirds  of  them  contain  this 
feature.  Among  the  imjxirtant  corporations  that  have  not 
included  this  cumulative  feature  may  be  mentioned:  Amer- 
ican Car  and  Foundry,  American  Linseed,  the  Pacific  Coast 
Company  issues.  Pressed  Steel  Car,  Sloss-Shcfiield,  and 
United  States  Rubber,  first  and  second  i)ref erred.  These 
companies,  however,  arc  not  important  relatively  in  their 


STOCKS  AND  THEIR  FEATURES  267 

agrrreo-atc  capital  when  compared  ^Yitll  American  Smelting, 
American  Sugar,  American  Tobacco,  United  States  Steel, 
ajid  other  large  issues  which  contain  the  cunudative  fea- 
ture. The  non-cimiulative  preferred  shares  among  indus- 
trials generally  represent  corporations  not  of  the  first  rank. 
The  Uirge  companies— the  ''trusts"— had  to  make  their 
preferred  stock  attractive  to  investors  by  adding  the  cumu- 
lative feature  when  thev  came  to  market  their  securities  in 
the  great  era  of  trust  promotion. 

Under  the  subject  of  common  stocks,  the  preference  as 
to  assets  on  dissolution  which  the  preferred  often  enjoys 
was  spoken  of.  This  feature  is  quite  general,  as  w^as  there 
stated,  among  industrials,  but  not  common  in  the  case  of 
railroads.  The  following  important  railway  systems,  how- 
ever, have  incorporated  this  feature  in  their  charters;  At- 
chison, Chicago  &  Alton,  Chicago  Great  Western,  Hock- 
ing Valley,  National  Railways  of  Mexico,  first  and  second 
preferred  in  order;  Norfolk  &  Western,  Pere  Marquette, 
Rock  Island,  and  Seaboard  Company.  In  tliis  list  will  be 
noted  the  three  recently  reorganized  corporations  which 
have  cumulative  dividends.  Evidently  it  is  becoming  cus- 
tomary to  give  the  preferred  stock  of  new  railways  as  many 
benefits  as  possible.  In  the  case  of  industrials  it  is  advisable 
to  reverse  the  classification,  as  w\as  done  under  dividends, 
and  name  only  those  stocks  which  are  not  preferred  as  to 
assets,  viz. :  American  Sugar,  Philadelphia  Company, 
Pittsburg  Coal,  and  United  Railways  of  St.  Louis.  Prac- 
tically every  large  industrial  concern  has  its  preferred  stock 
protected  by  giving  it  this  preference  should  it  ever  be- 
come necessary  to  distribute  the  corporate  assets.  This, 
of  course,  will  generally  be  an  advantage,  but  in  the  case 
of  very  strong  comjianies  it  may  not  be,  as  has  already  been 
pointed  out.  To  obviate  this  a  few  concerns,  all  unimpor- 
tant, have  provisions  like  the  ^[erchants  Warehouse  Com- 
pany, to  the  effect  that  the  preferred  stock  has  the  first 
claim  on  all  assets  up  to  $100  a  share,  and  then  shares  the 


268  JOHN  ADAMS 

balance  with  the  common  after  that  issue  has  received  $150 
a  share.  As  stated  before,  according  to  the  laws  of  the 
State  of  Xew  Jersey,  inider  which  most  of  the  large  indus- 
trials have  incorporated,  preferred  stockholders  are  to  re- 
ceive preference  in  the  distribution  of  coi-porate  assets  on 
dissolution,  up  to  par,  the  balance  going  to  the  ccnnmou 
stock  (Act  of  1896,  sec.  86,  ch.  185).  In  a  few  instances 
the  preferred  stock  has  a  preference  to  an  amount  over  par. 
Dominion  Coal,  for  example,  is  preferred  up  to  $115  a  share. 
Electric  Storage  Battery,  on  the  other  hand,  is  only  pre- 
ferred up  to  $10  a  share,  although  the  par  value  is  $50.  In 
most  cases,  too,  unpaid  cumulative  dividends  must  be  settled 
for  out  of  assets  before  the  common  stock  can  receive  any- 
thing. 

The  superior  voting  right  which  the  conmion  stock  some- 
times possesses  has  already  been  spoken  of.  The  preferred, 
likewise,  in  some  instances,  carries  the  entire  voting  power, 
though  not  so  often  as  the  common,  and  generally  in  less 
important  corporations.  The  Rock  Island  rnmpany  is  the 
only  example  of  first  rank  where  the  preferred  stock  has 
exclusive  voting  power.  This  fact  was  instrumental  in  the 
stock  exchange  investigation  of  the  sensational  rise  in  the 
common  stock  on  December  27, 1909,  and  its  equally  sudden 
decline,  for  it  conclusively  negatived  the  idea  of  a  ''fight  f<u- 
control,"  and  stamped  the  movement  as  purely  manipula- 
tive. On  the  other  hand,  the  preferred  stock  often  has  a 
voting  preference  in  regard  to  special  matters— usually  in 
case  of  the  creation  (U-  increase  of  funded  debt,  or  the  en- 
largement of  the  preferred  issue  itself.  More  than  a  ma- 
ioritv  of  the  issue,  usuallv  two-thirds  to  three-fourths,  is 
required  to  sanction  such  changes.  The  following  preferred 
stock  issues,  among  others,  may  be  cited  as  possessing  such 
features:  Atchison.  National  Railways  of  ]\rexico,  Norfolk 
&  AVestern,  Reading,  both  first  and  second  preferred.  South- 
ern, American  Can,  American  Snuff,  Central  Leather,  Tn- 
terborough-Metropolitan,    Sears-Roebuck    &    Co.,    United 


STOCKS  AND  THEIR  FEATURES  269 

Cigar  Manufacturers,  etc.  As  a  general  rule,  such  provi- 
sions are  not  of  great  practical  value. 

Mention  may  be  made  here  of  the  various  classes  of  pre- 
ferred stock,  and  the  safeguard  that  is  occasionally  thrown 
around  preferred  dividends  in  the  shape  of  what  may  be 
called  "dividend  funds."  The  difference  between  a  first 
and  second  preferred  stock  is  this :  that  while  both  are  senior 
to  the  common,  the  first  preferred  ranks  ahead  of  the  sec- 
ond in  regard  to  receiving  dividends,  and  in  some  cases  has 
priority  as  regards  assets,  also.  Of  the  corporations  whose 
stocks  are  active  on  the  New  York  Exchange  only  about  5 
per  cent  possess  two  or  more  classes  of  preferred.  Space 
will  not  permit  the  giving  of  a  complete  list  of  corporations 
having  more  than  one  issue  of  preferred  stock.  A  few  im- 
portant corporations,  however,  should  be  mentioned  as  be- 
longing to  this  class:  Colorado  &  Southern,  Erie,  National 
Railways  of  Mexico,  New  York,  Chicago  &  St.  Louis,  Perc 
Marquette,  Reading,  Seaboard  Company,  St.  Louis  &  San 
Francisco,  ^Mieeling  &  Lake  Erie,  American  Smelters  Se- 
curities, Associated  ^Ferchants,  H.  B.  Claflin  Company,  Chi- 
cago Railways,  Pacific  Coast,  and  United  States  Rubber.  All 
of  these  corporations  have  two  classes  of  preferred  stock, 
except  the  Chicago  Railways  Company,  which  has  three,  as 
has  also  Concord  &  Montreal.  No  instance  of  a  corporation 
having  more  than  three  classes  of  preferred  stock  has  been 
found. 

A  few  corporations  have  made  provision  for  the  accumu- 
lation of  a  certain  fund  out  of  which  dividends  on  the  pre- 
ferred shall  be  paid  during  times  of  business  depression, 
when  earnings  are  not  sufficient  to  meet  such  pa^nnents. 
The  National  Railways  Company  of  ^Mexico  affords  an  ex- 
ample. To  insure  semi-annual  pa^mients  of  one  per  cent  on 
the  first  preferred  for  three  years  from  January  1.  1908, 
a  separate  fund  of  $1,800,000  of  prior  lieu  bonds  and  $1,200,- 
000  of  guaranteed  general  bonds  was  set  aside,  and  these 
or  their  proceeds  may  be  drawn  upon  to  the  extent  that  net 


270  JOHN  ADAMS 

profits  shall  not  ])e  sufficient  to  make  such  pa\iiiouts.  A 
similar  provision  attaches  to  the  preferred  stock  of  United 
Factories,  Limited.  United  Cigar  Manufacturers  and 
Rears-"Roebuck  &  Co.  have  requirements  that  a  sur])lus  of 
$1,000,0(H\  in  eaeh  case,  shall  he  accumulated  before  any 
dividend  shall  he  ])aid  on  the  connnon.  This,  of  course, 
serves  as  a  i)rotecti()n  to  the  preferred  stockholders,  for  if 
there  ^vere  no  such  surplus  "svhen  net  earnings  were  little 
above  the  amount  needed  for  preferred  dividends,  it  mii^dit 
not  be  deemed  advisable  to  declare  such  dividends,  unless 
there  wei'e  such  a  surplus  fund  to  fall  back  upon  for  work- 
ing capital.  But,  as  said  before,  such  provisions  are  in- 
frequent. 

It  is  proper  to  state  here  that  what  is  comnKuily  known 
as  **pref erred"  stock  need  not  necessarily,  in  many  cases, 
be  called  ))y  that  name  at  all.  Under  the  laws  of  many 
states,  stock  ]")ossessing  the  characteristics,  of  preferred 
stock  mav  be  kno'^Ti  by  almost  anv  name,  so  louir  as  that 
name  does  not  genei'ally  import  some  other  variety  of  stock. 
Concord  &  ^lontreal  has  its  stock  divided  into  classes  1,11, 
11  r,  and  TV,  class  IV  corresponding  to  common  stock.  In 
this  case,  however,  the  distinction  is  of  very  little  practical 
account,  because  all  four  classes  are  guaranteed  7  per  cent 
di\idends  by  the  Boston  &  Elaine  Railroad.  With  the  Chi- 
cago Railways  Company,  however,  it  is  different,  since  its 
** participation  cei-tificates,"  series  I,  IT  and  III,  as  ex- 
l)lained  previously,  are  really  preferred,  while  series  IV  is 
ccmimon.  At  any  rate,  the  inunense  majority  of  cor])ora- 
tions  call  their  j (referred  stock  sinqdy  ''jn-ef erred." 

It  should  next  be  noted  that  preferred  stocks  may  pos- 
sess any  one  of  three  special  features— they  may  be  ''call- 
able," ''convertilde"  or  "])artici])ating."  Very  many  pre- 
ferred stocks  are  issued  to  ])roeure  money  f<>r  corporate 
jmri^oses  on  the  inception  of  the  company,  when  not  nuich 
could  be  realized  by  the  sale  of  connnon  stock,  and  bonds 
could  be  marketed  only  at  a  discx:)unt.    Such  companies  may 


STOCKS  AND  THEIR  FEATURES  271 

have  hopes  that  in  time  thi'ir  business  will  so  improve  that 
by  issuing  bonds  at  a  low  interest  rate,  or  by  selling  addi- 
tional common  stock  they  can  retire  the  preferred  stock, 
leaving  the  common  stock  in  a  much  better  position.  Hence 
the  callable  feature  may  be  inserted.  This  is  never  obligatoiy 
on  the  corporation,  but  merely  optional  with  the  directors. 
It  is  the  opposite  of  the  convertible  feature,  which  de- 
pends on  the  stockholders'  option.  On  the  following  page  is 
a  table  of  callable  preferred  stocks,  showing  their  provi- 
sions as  to  the  time  of  redemption,  and  the  calling  price.  If 
no  time  is  specified,  the  company's  option  is  understood. 

A  much  larger  list  could  be  compiled,  Init  it  is  better 
to  present  only  typical  or  fairly  large  companies.  The  in- 
dustrials are  generally  redeemable  at  a  premium,  and  are 
hedged  with  definite  provisions  regarding  the  time  at  whicl^ 
the  company  may  exercise  its  right.  The  railroads,  on  the 
contrary,  are  nearly  always  callable  at  par,  and  at  any  time 
the  company  may  choose.  It  is  generally  considered  a 
disadvantage  to  have  a  stock  callable,  as  the  holder  must 
then  seek  new  fields  for  his  capital,  usually  just  when  the 
investment  begins  to  look  attractive.  A  company  never  calls 
stock  when  it  is  in  difficulties;  Tonopah,  of  Nevada,  called 
its  preferred  just  before  it  began  dividend  payments  on  the 
common;  and  Northern  Pacific,  which  was  called  at  par, 
January  1,  1902,  had  been  paying  dividends  only  a  few 
vears. 

ft 

On  the  other  hand,  it  is  usually  advantageous  to  possess 
a  convertible  stock.  Here  the  option  is  with  the  stock- 
holder, not  with  the  company.  The  Reading  Company's  sec- 
ond preferred  stork  is  an  exception,  being  convertible  into 
one-half  first  preferred  and  one-half  common  at  par  on  vote 
of  the  directors.  As  the  common  is  now  selling  about  $30 
above  its  par  of  $50,  and  the  first  preferred  only  a  little 
below  i)ar,  the  ccmvertible  feature  is  valuable,  and  explains 
why  the  second  preferred  sells  at  a  level  considerably  above 
the  first.    There  is,  however,  a  clause  that  is  seldom  repro- 


272  JOHN  ADAMS 

TABLE  OF  CALLABLE  PREFERRED  STOCKS. 

Railroads.                     Time.  Price.  Remarks. 

Chicago   Gr.  Western Par  and  div'nds         "If    and    jvhen    al- 
lowed by  law." 

Erie,  1st  and  2d  p'fd Par 

Hocking  Valley   Par 

Reading.   1st  p'fd Par 

Reading.    2d    p'fd Par  "If    and    when    al- 

lowed by  law." 

Seaboard  Co.,  1st  p'fd Par 

Seaboard  Co..  2d  p'fd.  .\fter  1912   no  "Provided    1st  pre- 

ferred   has    been 
redeemed  or  <-■•" 
Industrials.  verted." 

American    Cotton    Oil 105 

Am.     Cities    Ry.    and 

Light    On    any    dividend 

date    107}  and  div'nds 

Am.     Smelters,     Sees. 

"B" .^fter  19.30 Par 

Amcr.   Typefounders. On  30  days' notice.  105  "Only    by    vote    of 

two-thirds  of  di- 
rectors." 

Borden's    Cond.    Milk 110  ".All.  or  any." 

Consolidated    Gas.    of 

Baltimore  120  and  div'nds 

Dominion     Coal     and 

Iron    After  May  1.  1910.  125  and  div'nds  If     not     previously 

converted        into 
Dominion     Iron     and  common. 

Steel On  3  mo's'  notice.  115  and  div'nds  Sul)ject   to  conver- 

sion  for  30  days 
after  notice. 
General  .Asphalt  On  90  days' notice.  110  Subject  to  conver- 

sion   during    pe- 
Michigan    State  Tele-  riod  of  noti.c 

phone Feb.  1  of  any  year.  Par  and  div'nds 

National   Lead    Par 

Sears,  Roebuck  A-  Co 125  and  div'nds  "All,  or  any." 

United    Railways    In- 
vestment       110  and  div'nds 

diicod  in  statistioal  works,  i.  o.,  tliat  the  socoiul  is  callaUc  at 
par,  "if  and  when  allowed  by  law,"  which  is  apparently 
nnkno^^^^.  or  if  known,  disre,c:arded,  by  those  who  keep  the 
second  preferred  at  its  present  price  level,  in  the  hope  that 
the  directors  will  allow  conversion.  It  reminds  one  of  the 
story,  probably  nntrno,  that  ^\v.  TTarriman  did  not  know. 


STOCKS  AND  THEIR  FEATURES  273 

when  he  bought  Northern  Pacific  preferred  that  the  stock 
could  be  called  before  the  directors  took  that  action.  Cer- 
tain it  is  that  their  power  so  to  do  was  never  paraded  before 
the  public,  and  it  lay,  a  secret  to  the  "outsiders,"  in  the  re- 
cesses of  the  railroad's  charter. 

lAjnong  industrials,  Allis-Chahners  preferred  stock  is 
convertible  into  common  at  par,  but,  of  course,  no  one  is 
doing  so,  as  the  common  is  selling  around  12,  and  the  pre- 
ferred about  40.  Associated  Merchants  first  preferred  stock 
is  convertible  into  second  preferred  or  common  stock  at  par 
while  the  books  are  open;  Dominion  Coal  preferred,  into 
common  at  par  before  May  1, 1910 ;  and  Dominion  Iron  and 
Steel  preferred  into  common  at  par,  and  at  any  time.  Elec- 
tric Storage  Battery  allows  conversion  on  the  same  terms 
as  the  Dominion  Iron  and  Steel  Company,  and  practically 
all  of  the  preferred  has  been  converted.  The  General 
Asphalt  Company  allows  conversion  on  the  basis  of  $150 
common  stock  for  $100  preferred ;  and  the  Hudson  &  ]\Ian- 
hattan  Railway,  into  common  at  110.  The  list  is  not  so  long 
as  that  of  the  callable  preferred  issues.  Southern  Pacific, 
on  July  15,  1909,  gave  its  preferred  stockholders  three 
options;  $115  in  cash,  or  $20  cash  and  $100  in  4J  per 
cent  twenty-year  debenture  bonds,  or  conversion  into  com- 
mon, par  for  par.  Practically  all  of  the  holders  of  the 
preferred  issue  availed  themselves  of  the  conversion  privi- 
lege. The  holders  took  a  stock  paying  one  per  cent  less 
dividend  than  they  formerly  received,  but  the  company  has 
as  large  possibilities  before  it  as  Union  Pacific  did  a  few 
years  ago,  and  they  undoubtedly  will  be  rewarded  in  the  end, 
for  they  now  have  a  "general"  stock,  which  has  the  right  to 
all  earnings  after  interest  charges  have  been  met.  The  con- 
version feature  as  attached  to  bonds  is  old  and  much  em- 
ployed, but  when  connected  "^^ith  preferred  stocks  is  com- 
paratively recent,  and  has  been  criticised  in  court  decisions. 

The  participating  feature  of  certain  preferred  stocks  is 
comparatively  unknown  to  the  public;  yet  it  is  of  the  ut- 

B.VII— 18 


274  JOHN  ADAMS 

most  importance,  for  it  is  practically  only  in  this  class  of 
pref('r]-('d  storks  tliat  the  ImldcM*  has  an  inponio  unlimited 
cxce])t  l)v  tile  (•(iin})any's  earning  ixtwcr.  In  cumulative 
preferred  stocks  he  is  nearly  always  limited  to  his  fixed  per- 
centacje,  ]mi  hci-c  he  shares  with  the  common  stock,  the  sur- 
plus remaining:  after  a  certain  amount  has  heen  paid  on  that 
class.  Following  is  a  table  showing  the  principal  railroad 
and  industrial  com]^anies  that  have  included  this  feature, 
togethei"  with  the  terms  of  the  participation  : 

TABLE  OF  PARTICIPATING  PREFERRED  STOCKS. 

Then 

Railroads.                     Preferred  Common  After  Which. 

Receives.  Receives. 

Buffalo,  Roch.  &  Pittsbg 6%             6%  Both  share  pro  rata. 

C,  M.  &  St.  Paul 7%             7%  Both  share  pro  rata. 

Chicago  &  Northwestern  ....   7%            7%  Preferred  37f ,  then  common 

3%,  then  share  pro  rata. 

C.  St.  P..  M.  &  0 7%            7%  Both  share  pro  rata. 

Hocking  Valley  4%            4%  Both  share  pro  rata. 

Iowa  Central  5%            5%  Both  share  pro  rata. 

Lake  Eric  &  Western 6%             6%  Both  share  pro  rata. 

Minn.  &  St.  Louis 5%             5%  Both  share  pro  rata. 

M..  St.  P.  &  S.  S.  M 7%            7%  Both  share  pro  rata. 

X.  Y.  C.  &  St.  L..  1st  p'f'd 57o            5%  Second    preferred    .'i'^o.    then 

all  share. 

Pittsburg,    Clcv.,    Cin.    &    St.  Preferred   S^r.  then   common 

Louis   4%            3%  5%,  then  share. 

Wabash  7%  7%  Both  share  equally. 

Wisconsin  Central 4%  4%  Both  share  equally. 

Industrials. 

Allis-Chalmcrs    7%  7%  Preferred  receives   X'^i    extra. 

Associated  Merchants.  1st  and 

2d  preferred 7%  7%  Both    preferreds   receive    J/o 

for  each   1%  paid  on  com- 
mon over  7%. 

Consolidated  Traction  6%  6%  Both  share  equally. 

Electric  Storage  Battery 1%  1%  Both  share  equally. 

Pacific  Coast.  2d  preferred 49o  4%  Both  share  equally. 

Westinghousc   Electric    7%  7%  Both  share  equally. 

Among  the  railroads,  Chicago  &  North  Western  preferred 
stock  is  now  receiving  1  per  cent  additional,  and  the  same 
is  true  of  the  Pittsburg,  Cincinnati,  Chicag*^  &  St.  Louis 


STOCKS  AND  THEIR  FEATURES  275 

Railroad.  In  the  industrials,  Pacific  Coast  second  preferred 
is  now  on  a  5  per  cent  basis  with  the  common;  Electric 
Storage  Battery  has  4  per  cent  paid  to  it  instead  of  one  per 
cent ;  AVestinghouse  Electric  for  four  years  before  the  panic 
of  1907,  which  threw  it  into  the  hands  of  a  receiver,  was  paid 
10  per  cent,  and  is  now  paying  its  regular  7  per  cent.  In 
a  few  of  these  companies,  such  as  Allis-Chalmers  of  Wa- 
bash, the  participation  feature  is  of  little  value,  as  there  is 
small  chance  that  earnings  will  ever  permit  of  any  pay- 
ments at  all  on  the  common.  How^ever,  most  of  the  corpora- 
tions, whose  preferred  stocks  are  not  now  participating  with 
the  common,  are  paying  regular  dividends  on  their  senior 
issue,  and  there  is  a  fair  prospect  that  in  time,  as  the  coun- 
try develops  and  grows  richer,  the  earnings  will  so  increase 
that  the  right  to  participate  with  the  common  in  surplus 
earnings  will  be  a  valuable  feature  of  the  preferred.  The 
same  remarks  apply  to  conversion,  which  may  not  be  ad- 
visable now,  but  which,  with  the  onward  march  of  this 
"bull"  country,  as  it  has  frequently  been  termed,  will  in 
the  future  become  a  prized  feature  of  stock  that  has  been 
bought  for  the  "long  pull." 

Following  our  classification  of  stocks  we  may  now  con- 
sider those  stocks  which  are  analogous  to  preferred.  The 
first  of  these  is  interest-bearing  stock  which  is  really  only 
another  name  for  preferred  stock.  For  interest  (instead 
of  dividends)  must  be  paid  upon  it  before  there  can  be  any 
disbursements  on  the  common.  Paradoxical  as  it  may  seem 
to  the  idea  of  a  stock  contrasted  with  that  of  a  l)()iid,  the 
payment  of  interest  may  be  enforced  at  law,  as  the  sub- 
scription to  the  stock  is  regarded  "as  a  contract  in  tlie  nature 
of  an  agreement  to  pay  a  dividend,  but  is  lawful  only  when 
it  can  be  construed  as  requiring  pa^inent  of  such  interest 
from  profits  alone."  Such  issues  are  obsolete  today.  There 
is  no  reason,  however,  why  a  corporation  should  not  issue 
such  stock,  should  it  deem  it  ad\isable.  From  the  records 
we  have  selected  the  following  examples: 


276  JOHN  ADAMS 

Detroit  &  ^Milwaukee,  acquired  by  the  Great  Western 
of  Canada,  wliich  in  turn  was  absorbed  by  the  Grand  Trunk. 

Cleveland  &  Toledo,  leased  to  the  Cleveland,  Painesville 
&  Ashtabula,  which  was  consolidated  with  the  Lake  Shore. 

Vermont  &:  ^fassachusetts,  leased  to  Boston  &  Elaine. 

Pittsburi]:  &  Connellsville,  merged  with  the  Baltimore 
<^'  Oliio. 

Pittshurc:  &:  Stouhensville,  acquired  by  the  Steubens- 
ville  &  Indiana,  whifh  was  taken  over  by  the  Pittsburg, 
China s:o  &  St.  Louis,  which  was  ultimatelv  absorbed  bv  the 
Pennsylvania  Company. 

Ti'oy  &  Greenfield,  acquirod  by  the  Troy  &  Boston,  which 
was  taken  over  by  the  Fitchburg,  which  in  turn  was  leased 
to  the  Boston  S:  "^^aine. 

All  of  the  above  companies  were  comparatively  small, 
mid  all  have  been  absorbed  by  larger  systems,  generally  leav- 
ing no  trace  of  their  stock.  Consequently,  the  subject  is 
of  but  little  more  than  academic  interest. 

''Special  stock"  is  a  creation  of  certain  ^Lassachusetts 
statutes,  especially  the  Acts  of  1855  and  1882.  Lender  the 
latter  enactment,  manufacturing  ''and  other  corporations,'' 
by  vote  of  three-quarters  of  their  stockholders  at  a  meeting 
called  especially  for  this  purpose,  may  authorize  "special 
stock,"  which  must  never  exceed  two-thirds  of  the  actual 
capital,  bearing  semi-annual  dividends  not  exceeding  4  per 
cent  and  subject  to  redemption  at  par  after  a  fixed  date, 
which  must  be  expressed  on  the  certificate.  The  holder 
of  such  stock  is  in  no  case  liable  for  the  debts  of  the  coi-pora- 
tion.  Instances  of  such  stock  crop  out  now  and  then  be- 
cause of  lawsuits  over  the  rights  of  their  holders,  but  as 
these  generallv  onlv  occur  after  the  iusolvencv  of  the  cor- 
poratiou,  they  are  of  little  use  if  we  wish  a  present  example. 
The  Boston  Machine  Company  had  such  stock,  as  did  th* 
Greenfield  Tool  Company,  but  both  are  defunct.  The  near- 
est modei-n  analogy  is  a  callable  preferred  stock,  but  it  also 
resembles  in  some  wavs  a  short-term  note,  for  the  oblicration 


STOCKS  AND  THEIR  FEATURES  277 

to  pay  dividends  is  absolute,  not,  as  in  interest-bearing  or 
ordinary  preferred  stock,  contingent  on  there  being  suiB- 
cient  profits  so  to  do,  and  it  is  also  usually  redeemable  in  a 
short  time. 

"Guaranteed  stock"  is  a  term  properly  applied  to  the 
stock  of  a  company,  the  dividends  on  which  are  guaranteed 
by  another  corporation,  provided  there  are  sufficient  earn- 
ings to  meet  them,  but  not  otherwise.  It  is  sometimes  er- 
roneously employed  as  describing  preferred  stock,  i.  e.,  the 
corporation  giiaranteeing  the  dividends  on  its  own  stock. 
Guaranteed  stocks  usually  arise  from  a  consolidation  or 
lease  of  one  road,  or  industrial  corporation,  with  or  to  an- 
other, and  are  much  more  frequently  found  in  the  case  of 
railroads  than  industrials.  A"  full  list  of  all  the  guaranteed 
stocks  in  the  country  would  occupy  pages,  and  thus  only  a 
few  important  examples  are  given : 

Railroad.  Guarantor.  Terms. 

Catawissa    Reading  5%  on  stock,  and  $8,000. 

Central  of  Vermont Grand  Trunk  Traffic   guarantee. 

Cleveland  &  Pittsburg Penna 7%  on  stock,  and  bond  in- 
terest. 

Concord  &  Montreal B.  &  M 77c  on  stock. 

Delaware   P.  W.  &  B.  (Penna.)  . .  Net  earnings. 

Fitchburg B.  &  M 5%    on     preferred,    1%    on 

common,  bond  interest 
and  expenses. 

Old  Colony N.  Y.,  X.  H.  &  H 77c.    and    stock    convertible 

into  New  Haven. 

Pittsburg.  Ft.  Wayne,  etc. . .  Penna 7%  on  stock  and  on  "special 

improvement,"  etc. 

Among  industrial  corporations  guarantees  of  stock  are 
rare.  American  Smelters  Securities,  preferred  "B,"  is  the 
only  example  of  importance.  They  are  generally  confined 
to  public  service  corporations.  Most  guarantees  are  suc- 
cessful—the guarantor  maintaining  the  di\idends  promised. 
Some  are  not,  but  there  are  few  as  bad  as  the  lease  of  the 
Pere  Marquette  to  the  Cincinnati,  Hamilton  &  Dayton  for 
999  years,  in  March,  1905,  for  5  per  cent  on  the  common 
and  4  per  cent  on  the  preferred  of  the  former,  both  com- 


278  JOHN  ADAMS 

panics  goiiij^  info  tlio  liaiids  of  a  receiver  in  Deeeniber  of 
the  same  year.  Tlie  lease  was  subsequently  annulled.  Tt 
ar;,nies  a  close  study  of  the  earnin<^s  and  finan<'ial  condition 
of  the  com[)any  itself,  a  careful  scrutiny  of  the  affairs  of 
the  guarantor,  and  not  the  mere  acceptance  of  the  word 
''guarantee"  as  proof  of  the  possession  of  a  gilt-edged  in- 
vestment. 

The  leased-line  stock  of  the  Illinois  Central,  amounting 
to  $10,000,000,  and  paying  4  per  cent,  secured  by  the  deposit 
of  stocks  of  ecpial  value,  comjxared  with  $123.5.") '2.000  com- 
mon, may  be  said,  in  a  sense,  to  be  *', guaranteed,"  though  it 
is  not  within  the  definition  given  above.  Similarly,  the 
stocks  with  provisions  for  the  accunuilation  of  special 
funds,  or  surpluses,  mentioned  before,  have  something  in 
the  nature  of  a  guarantee,  though  they  are  evidently  not 


li 


guaranteed." 


''Founders'  stock"  is  practically  unkno-^Ti  in  this  coun- 
try. Xo  instance  can  be  found  in  the  manuals,  though  it 
may  exist  in  small  corporations.  Briefly,  it  may  ])e  said  to 
be  stock  ranking  ahead  of  preferred,  entitled  to  a  certain 
fixed  dividend  and  then  to  a  certain  proporti(Ui  of  the  sur- 
l)lus  after  dividends  on  all  classes  have  been  paid.  As- 
sume a  corpoiation  with  $100,000  G  per  cent  founders' 
stock,  $4,900,000  G  per  cent  preferred,  and  5,000,000  conunon 
stoek,  and  a  balance  for  dividends  for  the  year  of  $1,000,- 
000,  The  founders'  stock  would  receive  $6,000,  the  pre- 
ferred $294,000,  and  the  ccmunon,  say,  $250,000.  The  sur- 
plus for  the  yeai-  would  then  be  $450,000.  The  founders' 
stock  is  entitled  to  a  certain  ]u-oporti(Ui  of  this  — tixed  by 
the  articles  of  incorj)oration— usually  one-quarter  to  (Uie- 
half.  Thus,  in  addition  to  its  6  per  cent,  this  class  would 
be  ].aid  fr(»m  $112,500  to  $225,000.  making  an  extra  divi- 
dend of  from  ^V1\  to  225  per  cent,  according  to  the  pro])or- 
tion  of  the  sur]ilus  it  would  receive.  If  we  were  to  capi- 
talize the  last  figui'e  at  G  ])er  cent,  the  stock  would  be  worth 
about  $3,800  a  share.  There  ar<'  other  provisions  concerning 


STOCKS  AND  THEIR  FEATURES  279 

the  method  of  arriving  at  the  amount  to  be  distributed  in 
dividends,  but  this  is  the  most  usual.  It  was  formerly  com- 
mon in  England,  but  is  now  looked  upon  with  disfavor. 
Such  stock  is  usually  given  to  promoters,  or  to  persons  of 
iulluence  in  consideration  of  their  lending  the  weight  of 
their  names  to  new  corporations,  and  is,  naturally,  highly 
valued  by  its  fortunate  possessors.  Under  the  laws  of  New 
Jersev  it  is  legal  to  create  such  stock. 

Having  described  the  various  classes  of  preferred  stocks 
and  their  characteristics,  and  those  analogous  to  preferred 
issues,  there  still  remains  for  discussion  the  so-called  de- 
benture stock.    This  class  of  stock  mav  be  said  to  be  on  the 
margin  between  mortgage  bond  issues  and  regular  stock 
issues.    To  the  ordinary  person  a  "debenture"  signifies  a 
non-mortgage  bond.    But  it  is  also  used  to  describe  a  stock. 
The  whole  amount  secured  mav  be  *' treated  as  borrowed 
capital  consolidated  into  one  mass  for  the  sake  of  conven- 
ience," and  certificates  issued  entitling  the  holder  "to  a  cer- 
tain sum,  part  of  this  mass."      It  differs  from  stock  in  that 
the  company  promises,  generally  in  the  form  of  a  covenant, 
to  pay  interest  on  specified  dates.    This  interest  has  priority 
over  dividends  on  any  class  of  stock  whatever,  whether  guar- 
anteed or  not.     Such  issues  are  common  in  England  and 
Canada,  but  rare  in  the  United  States,  though  debenture 
bonds  are  well  known  here.    The  old  Chicago  Great  Western 
Railway  had  such  an  issue,  which,  as  it  sh(Mild,  fared  much 
better  in  the  reorganization  than  either  of  the  preferred 
stocks.    The  Green  Bav  &  AVestern  Railroad  has  two  classes 
of  debentures-class  "A,"  $600,000;  class  "B,"  $7,000,000 
—compared  with  $2,500,000  of  common  stock.    The  Cana- 
dian Pacific,  also,  has  a  large  issue  of  irredeemable  del)entur(' 
stock  — for  such  stock  may  l^e  thus  issued,  or  with  provisions 
providing  for  redem]^tion  after  a  certain  date.    The  Cana- 
dian Northern  Ontari<^  has  debentures  to  be  paid  off  in 
1936,  while  those  of  the  Canadian  Noi-thern  Quebec  are  per- 
petual. 


280  JOHN  ADAMS 

Throiipfhout  this  classification  nothing  has  been  ?aid  of 
values,  the  present  task  being  mainly  one  of  ex]")osition,  and 
not  of  advice.  In  closing,  we  express  the  hope  that  intend- 
ing purchasers  will  look  well  to  the  class  of  stock  in  which 
they  contemplate  investing,  examining  all  of  the  provisions 
of  that  particular  issue,  consulting,  if  necessary,  the  articles 
of  incoi']:>oration  of  the  company.  Only  by  knowing  the 
provisions  of  the  stock  certificate— is  it  callable  or  con- 
vertible, participating  or  not,  preferred  as  to  assets,  etc.,  and 
any  other  special  features  that  may  exist— can  an  investor 
be  prepared,  not  only  to  avoid  losses,  but  to  gain  safety  and 
profits.  A  fundamental  error  in  regard  to  the  features  of 
the  stock  may  defeat  the  results  of  the  most  painstaking 
analysis  of  value,  and  when  such  provisions  can  usually  be 
so  easily  ascertained,  there  is  no  reason  for  encountering 
risks,  or  allowing  profits  to  escape  that  might  otherwise 
accrue. 


STOCK  MARKETS  AND  EXCHANGES. 

FROM  OFFICIAL  REPORT  ON  NEW  YOR5C  STOCK  EXCHANGE. 

The  Subject  in  General. 

Markets  have  sprung  into  being  wherever  buying  and 
selling  have  been  conducted  on  a  large  scale.  Taken  in 
charge  by  regular  organizations  and  controlled  by  rules, 
such  markets  become  exchanges.  In  New  York  City  there 
are  two  exchanges  dealing  in  securities  and  seven  in  com- 
modities. In  addition  there  is  a  security  market,  without 
fixed  membership  or  regular  officers,  known  as  the  "Curb." 
The  exchanges  dealing  in  commodities  are  incorporated, 
while  those  dealing  in  securities  are  not. 

Conmiodities  are  not  held  for  permanent  investment, 
but  are  bought  and  sold  primarily  for  the  purpose  of  com- 
mercial distribution ;  on  the  other  hand,  securities  are  pri- 
marily held  for  investment;  but  both  are  subjects  of  specu- 
lation. Speculation  consists  in  forecasting  changes  of  value 
and  buying  or  selling  in  order  to  take  advantage  of  them ;  it 
may  be  wholly  legitimate,  pure  gambling,  or  something 
partaking  of  the  qualities  of  both.  In  some  form  it  is  a  nec- 
essary incident  of  productive  operations.  When  carried  on 
in  connection  with  either  commodities  or  securities  it  tends 
to  steady  their  prices.  Where  speculation  is  free,  fluctua- 
tions in  prices,  otherwise  violent  and  disastrous,  ordinarily 
become  gradual  and  comparatively  harmless.  Moreover,  so 
far  as  commodities  are  concerned,  in  the  absence  of  specu- 
lation, merchants  and  manufacturers  would  themselves  be 
forced  to  carry  the  risks  involved  in  changes  of  prices  and 
to  bear  them  in  the  intensified  condition  resulting  from  sud- 
den and  violent  fluctuations  in  value.  Risks  of  this  kind 
which  merchants  and  manufacturers  still  have  to  assume  are 
reduced  in  amount,  because  of  the  speculation  prevailing; 

281 


282         STOCK  MARKETS  AND  EXCHANGES 

and  many  of  these  milder  risks  they  are  enabk'd,  by  "hedg- 
ing," to  transfer  to  others.  For  the  merchant  or  manufae- 
tiirer  the  speculator  performs  a  service  which  has  the  effect 
of  insurance. 

In  law,  speculation  becomes  gam])lin^  when  the  trading 
which  it  involves  does  not  lead,  and  is  not  intended  to  lead, 
to  the  actual  passing  from  hand  to  hand  of  the  property 
dealt  in.  Thus,  in  the  recent  case  of  Hurd  v.  Taylor  (181 
N.  Y.,  231),  the  Court  of  Appeals  of  Xew  York  said : 

"The  law  of  this  State  as  to  the  purchase  and  sale  of 
stocks  is  well  settled.  The  imrchase  of  stocks  through  a 
broker,  though  the  party  ordering  such  purchase  does  not 
intend  to  hold  the  stocks  as  an  investment,  but  expects  the 
broker  to  carry  them  for  him  with  the  design  on  the  pai't  of 
the  jmrchaser  to  sell  the  stocks  again  when  their  market 
value  has  enchanced,  is,  however  speculative,  entirely  legal. 
Equally  so  is  a  'short  sale,'  where  the  seller  has  not  the  stock 
he  assumes  to  sell,  ])ut  borrows  it  and  ex]iects  to  re]dace  it 
when  the  market  value  has  declined.  But  to  make  such 
transactions  legal,  they  must  contemplate  an  actual  pur- 
chase or  an  actual  sale  of  stocks  by  the  broker,  or  through 
him.  If  the  intention  is  that  the  so-called  broker  shall  pay 
his  customer  the  difference  between  the  market  price  at 
which  the  stocks  were  ordered  purchased  and  that  at  wliich 
they  were  ordered  sold,  in  case  such  fluctuation  is  in  favor 
of  the  customer,  or  that  in  case  it  is  against  the  custouior, 
the  customer  shall  pay  the  broker  that  difference,  no  ])ur- 
chases  or  sales  being  made,  the  transaction  is  a  wmlici'  and 
therefore  illegal.  Such  business  is  merely  gainl»ling,  in 
which  the  so-called  commission  for  ])iirchases  and  sales  that 
are  never  made  is  simply  the  percentage  which  in  other 
gambling  games  is  reserved  in  favor  of  the  keeper  of  the 
establishment." 

This  is  also  the  law  respecting  commodity  transactions. 

The  rules  of  all  the  exchanges  forbid  gambling  as  defined 
by  this  opinion;  but  they  make  so  easy  a  technical  delivery 


STOCK  MARKETS  AND  EXCHANGES         283 

of  the  property  contracted  for  that  practical  effect  of  much 
speculation,  in  point  of  form  legitimate,  is  not  greatly  differ- 
ent from  that  of  gambling.  Contracts  to  buy  may  be  pri- 
vately offset  by  contracts  to  sell.  The  offsetting  may  be 
done,  in  a  systematic  way,  by  clearing  houses,  or  by  "ring 
settlements. ' '  Where  deliveries  are  actually  made,  property 
may  be  temporarily  borrowed  for  the  purpose.  In  these 
ways  speculation  which  has  the  legal  traits  of  legitimate 
dealimi-  mav  Qo  on  almost  as  freelv  as  mere  wagering,  and 
may  have  most  of  the  pecuniary  and  immoral  effects  of 
gambling  on  a  large  scale. 

A  real  distinction  exists  between  speculation  which  is 
carried  on  by  persons  of  means  and  experience,  and  based 
on  an  intelligent  forecast,  and  that  wiiich  is  carried  on  by 
persons  without  these  qualifications.  The  former  is  closely 
connected  with  regular  business.  While  not  unaccompanied 
by  waste  and  loss,  this  speculation  accomplishes  an  amount 
of  good  which  offsets  much  of  its  cost.  The  latter  does  but 
a  small  amount  of  good  and  an  almost  incalculable  amount 
of  evil.  In  its  nature  it  is  in  the  same  class  with  gambling 
upon  the  race-track  or  at  the  roulette  table,  but  is  practiced 
(m  a  vastly  larger  scale.  Its  ramifications  extend  to  all  parts 
of  the  country.  It  involves  a  practical  certainty  of  loss  to 
those  who  engage  in  it.  A  continuous  stream  of  wealth, 
taken  from  the  actual  ca])ital  of  innumerable  persons  of  rel- 
atively small  means,  swells  the  income  of  brokers  and  oper- 
ators dependent  on  this  class  of  business;  and  in  so  far  as  it 
is  consumed  like  most  income,  it  represents  a  waste  of  cap- 
ital. The  total  amount  of  this  waste  is  rudely  indicated  by 
the  obvious  cost  of  the  vast  mechanism  of  brokerage  and  by 
mani])ulators'  gains,  of  both  of  which  it  is  a  large  constitu- 
ent element.  If  there  were  not  a  continuous  infiux  of  new 
customers,  re])la<iiig  those  whose  losses  force  them  out  of 
the  "Street,"  this  costly  mechanism  of  speeulation  could 
not  possibly  be  maintained  on  anything  like  its  present 
scale. 


284         STOCK  MARKETS  AND  EXCHANGES 

The  Problem  to  Be  Solved. 

The  problem,  wherever  speculation  is  strongly  rooted, 
is  to  eliminate  that  which  is  wasteful  and  morally  destruc- 
tive,  while  retainin.c:  and  allowing  free  play  to  that  which  is 
beneficial.  The  difliculty  in  the  solution  of  the  problem  lies 
in  the  practical  impossibility  of  distinguishing  what  is  virtu- 
ally gambling  from  legitimate  speculation.  The  most  fruit- 
ful policy  will  be  found  in  measures  which  will  lessen  specu- 
lation by  persons  not  qualified  to  engage  in  it.  In  carrying 
ont  such  a  policy  exchanges  can  accom])lish  more  than  legis- 
latures. In  connection  with  our  reports  on  the  different  ex- 
changes, as  well  as  on  the  field  of  investment  and  speculation 
which  lies  outside  of  the  exchanges,  we  shall  make  recom- 
mendations directed  to  the  removal  of  various  evils  now  ex- 
isting and  to  the  reduction  of  the  volume  of  speculation  of 
the  gambling  t^-^^e. 

The  New  York  Stock  Exchange. 

The  Xow  York  Stock  Exchange  is  a  voluntary  associa- 
tion, limited  to  1.100  meml^ers,  of  whom  about  700  are  ac- 
tive, some  of  them  residents  of  other  cities.  Mt'Uiber- 
ships  are  sold  for  about  jfSO.OOO.  The  Exchange  as  sucli 
does  no  business,  merely  providing  facilities  to  mem- 
bers and  regnlating  their  conduct.  The  governing  power  is 
in  an  elected  committee  of  fortv  members  and  is  plenary  in 
scope.  The  business  tran.sacted  on  the  floor  is  the  purchase 
and  sale  of  stocks  and  bonds  of  corporations  and  govern- 
ments. Practically  all  transactions  must  be  com]ileted  by 
deliveiy  and  payment  on  the  following  day. 

The  mechanism  of  the  Exchange,  provided  by  its  consti- 
tution and  rules,  is  the  evolution  of  more  than  a  century. 
An  organization  of  stock  brokers  existed  here  in  1792, 
acquiring  more  definite  fc^i-m  in  1S17.  It  seems  certain  that 
for  a  long  period  the  members  were  brokers  or  agents  only; 
at  the  present  time  many  are  principals  as  well  as  agents, 


STOCK  MARKETS  AND  EXCHANGES         285 

trading  for  themselves  as  well  as  for  their  customers.  A 
number  of  prominent  capitalists  hold  memberships  merely 
for  the  purpose  of  availing  themselves  of  the  reduced  com- 
mission charge  which  the  rules  authorize  between  mem- 
bers. 

The  vohmie  of  transactions  indicates  that  the  Exchange 
is  today  probably  the  most  important  financial  institution 
in  the  world.  In  the  past  decade  the  average  annual  sales 
of  shares  have  been  196,500,000,  at  prices  involving  an  an- 
nual average  turnover  of  nearly  $15,500,000,000 ;  bond  trans- 
actions averaged  about  $800,000,000.  This  enonnous  busi- 
ness affects  the  financial  and  credit  interests  of  the  country 
in  so  large  a  measure  that  its  proper  regulation  is  a  matter 
of  transcendent  importance.  While  radical  changes  in  the 
mechanism,  which  is  now  so  nicely  adjusted  that  the  trans- 
actions are  carried  on  with  the  minimum  of  friction,  might 
prove  disastrous  to  the  whole  country,  nevertheless  meas- 
ures should  be  adopted  to  correct  existing  abuses. 

Patrons  of  the  Exchange. 

The  patrons  of  the  Exchange  may  be  divided  into  the 
following  gi'oups : 

(1)  Investors,  who  personally  examine  the  facts  relating 
to  the  value  of  securities  or  act  on  the  advice  of  reputable 
and  experienced  financiers,  and  pay  in  full  for  what  they 
buv. 

(2)  Manipulators,  whose  connection  with  corporations 
issuing  or  controlling  particular  securities  enables  them 
under  certain  circumstances  to  move  the  prices  up  or  down, 
and  who  are  thus  in  some  degree  protected  from  dangers 
encountered  by  other  speculators. 

(3)  Floor  traders,  who  keenly  study  the  markets  and 
the  general  conditions  of  business,  and  acquire  early  infor- 
mation concerning  the  changes  which  affect  the  values  of 
securities.  From  theii'  familiarity  with  the  technique  of 
dealings  on  the  Exchange,  and  ability  to  act  in  conceii"  with 


286         STOCK  MARKETS  AND  EXCHANGES 

others,  and  thus  iiiauipiUate  values,  they  are  supposed  to 
liave  special  advantages  over  other  traders. 

(4)  Outside  operators  havi^ig  cajntal,  experience,  and 
knowledge  of  the  general  conditions  of  business.  Testimony 
is  clear  as  to  the  result  which,  in  the  long  run,  attends  their 
operations;  connnissions  and  interest  charges  constitute  a 
factor  always  working  against  them.  Since  good  luck  and 
bad  luck  alternate  in  time,  the  gains  only  stinmlate  these 
men  to  larger  ventures,  and  they  persist  in  them  till  a  se- 
rious or  ruinous  loss  forces  them  out  of  the  ** Street." 

(5)  Inexperienced  persons,  who  act  on  interested  advice, 
"tips,"  advertisements  in  newsjiapers,  or  circulars  sent  by 
mail,  or  ''take  flyers,"  in  absolute  ignorance,  and  with  blind 
confidence  in  their  luck.  Almost  without  exception  they 
eventually  lose. 

Character  of  Transactions. 

It  is  unquestionable  that  only  a  small  part  of  the  trans- 
actions upon  the  Exchange  is  of  an  investment  character; 
a  substantial  part  may  be  characterized  as  virtually  gam- 
bling. Yet  we  are  iniable  to  see  how  the  State  could  distin- 
guish by  law  between  proper  and  improjicr  transactions, 
since  the  forms  and  the  mechanisms  used  are  identical. 
Rigid  statutes  directed  against  the  latter  would  seriously 
interfere  with  the  former.  The  experience  of  Germany  and 
similar  legislation  is  illuminating.  But  the  Exchange,  with 
the  plenary  power  over  members  and  their  operations,  could 
provide  correctives,  as  we  shall  show. 

Margin-Trading. 

Purchasing  securities  on  margin  is  as  legitimate  a  trans- 
action as  a  purchase  of  any  othei-  pro]ierty  in  which  part 
pa}nnent  is  deferred.  We  therefore  see  no  reason  whatso- 
ever for  recommending  the  radical  change  suggested,  that 
margin-trading  be  ]irohibited. 

Two  practices  are  prolilic  of  losses,  namely,  buying  active 


STOCK  MARKETS  AND  EXCHANGES         287 

securities  on  small  margins  and  buying  unsound  securities, 
paying  for  them  in  full.  The  losses  in  the  former  case  are 
due  to  the  quick  turns  in  the  market,  to  which  active  stocks 
are  subject;  these  exhaust  the  margins  an<l  call  for  more 
money  than  the  purchasers  can  sui)])ly.  The  losses  in  the 
latter  case  are  largely  due  to  misrepresentations  of  inter- 
ested parties  and  unscrupulous  manipulations. 

To  correct  the  evident  misrepresentation  and  manii)uhi- 
tion,  we  shall  offer  in  another  part  of  this  report  certain  rec- 
ommendations. In  so  far  as  losses  are  due  to  insufficient  mar- 
gins, they  would  be  materially  reduced  if  the  customary  per- 
centage of  margins  were  increased.  The  amount  of  mar- 
gin which  a  l)roker  requires  from  a  speculative  buyer  of 
stocks  depends,  in  each  case,  on  the  credit  of  the  buyer;  and 
the  amount  of  credit  wliicli  one  person  may  extend  to  an- 
other is  a  dangerous  subject  on  which  to  legislate.  Upon 
the  other  hand,  a  rule  made  by  the  Exchange  could  safely 
deal  with  the  prevalent  rate  of  margins  required  from  cus- 
tomers. In  preference,  therefore,  to  recommending  legisla- 
tion, we  urge  upon  all  brokers  to  discourage  specidation  up- 
on small  margins,  and  upon  the  Exchange  to  use  its  in- 
fluence, and,  if  necessary,  its  power,  to  prevent  members 
from  soliciting  and  generally  accepting  business  on  a  less 
margin  than  20  per  cent. 

Pyramiding. 

^'Pyramiding,"  whicli  is  the  use  of  paper  profits  in  stock 
transactions  as  a  mai'gin  for  further  connnitments,  should 
be  discouraged.  The  practice  tends  to  produce  more  ex- 
treme fluctuations  and  more  rai)id  wi])ing  out  of  margins. 
If  the  stock  ])rokers  and  the  l)anks  would  make  it  a  nde 
to  value  securities  for  the  purpose  of  margin  or  collateral, 
not  at  the  current  price  of  the  moment,  but  at  the  average 
price  of,  say,  the  previous  three  months  (])rovided  that  such 
average  price  were  not  higher  than  the  price  of  the  moment), 
the  dangers  of  i^yramidiug  would  be  largely  prevented. 


288         STOCK  MARKETS  AND  EXCHANGES 

Short-Selling. 

TTc  have  been  strongly  urged  to  advise  the  prohibition 
or  limitation  of  short  sales,  not  only  on  the  theory  that  it  is 
wrong  to  agree  to  sell  what  one  does  not  possess,  but  that 
sueh  sales  reduce  the  market  price  of  the  securities  involved. 
We  do  not  think,  that  it  is  WTong  to  agree  to  sell  something 
that  one  does  not  now  possess,  but  expects  to  obtain  later. 
Contracts  and  agreements  to  sell,  and  deliver  in  the  future, 
property  which  one  does  not  possess  at  the  time  of  the  con- 
tract are  common  in  all  kinds  of  business.  The  man  who  has 
**sold  short"  must  some  dav  buv  in  order  to  return  the  stock 
which  he  has  borrowed  to  make  the  short  sale.  Short-sellers 
endeavor  to  select  times  when  pi'ices  seem  high  in  order  to 
sell,  and  times  when  prices  seem  low  in  order  to  buy,  their 
action  in  both  cases  serving  to  lessen  advances  and  diminish 
declines  of  price.  Tn  other  words,  short-selling  tends  to  pro- 
duce steadiness  in  prices,  which  is  an  advantage  to  the  com- 
munity. No  other  means  of  restraining  unwarranted  mark- 
ing up  and  down  of  prices  has  been  suggested  to  us. 

The  legislation  of  the  9>f(\fo  of  New  York  on  the  subject 
of  short-selling  is  significant.  Tn  1812  the  Legislature 
passed  a  law  declaring  all  contracts  for  the  sale  of  stocks 
and  l)onds  void,  unless  the  seller  at  the  time  was  the  actual 
o\\'ner  or  assignee  thereof  or  authorized  l)y  such  o^^^ler  ov 
assignee  to  sell  the  same.  Tn  1S58  this  act  was  repcnled  by 
a  statute  now  in  force,  which  i-eads  as  follows: 

**An  agreement  for  the  purchase,  sale,  transfer  or  deliv- 
erv  of  a  certificate  or  other  evidence  of  debt,  issued  bv  the 
United  States  or  ]\v  any  State,  or  municipal  or  other  cor- 
poration, or  any  share  or  interest  in  the  stock  of  any  bank, 
corporation  or  joint-stock  association,  incorporated  or  or- 
ganized under  the  laws  of  the  United  States  or  of  any  State, 
is  not  void,  or  voidable,  because  the  vendor,  at  the  time  of 
making  such  contract,  is  not  the  owner  or  possessor  of  the 
certificate,  or  certificates,  or  other  evidence  of  debt,  share  or 
interest.*' 


STOCK  MARKETS  AND  EXCHANGES         289 

It  has  been  urged  that  this  statute  "specifically  legalizes 
stock  gambling."  As  a  matter  of  fact,  however,  the  law 
would  be  precisely  the  same  if  that  statute  were  repealed, 
for  it  is  the  well-settled  common  law  of  this  country,  as 
established  by  the  decisions  of  the  Supreme  Court  of  the 
United  States  and  of  the  State  courts,  that  all  contracts, 
other  than  mere  wagering  contracts,  for  the  future  purchase 
or  sale  of  securities  or  commodities  are  valid,  whether  the 
vendor  is,  or  is  not,  at  the  time  of  making  such  contract, 
the  OA^Tier  or  possessor  of  the  securities  or  commodities  in- 
volved, in  the  absence  of  a  statute  making  such  contracts  ille- 
gal. So  far  as  any  of  these  transactions  are  mere  wagering 
transactions,  they  are  illegal,  and  not  enforceable,  as  the 
law  now  stands. 

It  has  been  suggested  to  us  that  there  should  be  a  re- 
quirement either  by  law  or  by  rule  of  the  Stock  Exchange, 
that  no  one  should  sell  anv  securitv  without  identifving  it 
bv  numljer  or  otherwise.  Such  a  rule  would  cause  great 
practiciil  difficulties  in  the  case  of  securities  not  present 
in  New  York  at  the  time  when  the  owner  desires  to  sell  them, 
and  would  increase  the  labor  and  cost  of  doing  business. 
But,  even  if  this  were  not  the  effect,  the  plan  contemplates  a 
restriction  upon  short  sales,  which,  for  the  reasons  set  forth 
above,  seems  to  us  undesirable.  It  is  true  that  this  identifi- 
cation plan  exists  in  England  as  to  sales  of  bank  shares 
(Leeman  act  of  1867)  ;  but  it  has  proved  a  dead  letter.  It 
has  also  been  used  in  times  of  apprehended  ]')nuic  up(tu  the 
French  Bourse,  but  ()i)ini()iis  in  regard. to  its  effect  there 
are  conflicting.  AVhile  some  contend  that  it  has  been  useful 
i]i  ]^reventing  ]^anics,  others  affirm  that  it  has  bcf^n  used 
simply  for  the  "i^urpose  of  protecting  bankers  who  were 
loaded  down  with  certain  securities  whirli  they  were  try- 
ing to  distribute,  and  who,  through  ])olitic<il  influence,  pro- 
cured the  adoption  of  the  rule  for  their  special  benefit. 

B.VII— 19 


290         STOCK  MARKETS  AND  EXCHANGES 

Manipulation  of  Prices. 

A  subject  to  which  we  have  devoted  mucli  time  and 
thoiic:ht  is  that  of  the  iiiaiiii)ulation  of  prices  by  ][\v'j:o  in- 
terests.   This  falls  intu  two  general  classes: 

(1)  Tliat  whioh  is  resorted  to  for  the  purpose  of  mak- 
ing a  market  for  issues  of  new  securities. 

(2)  Tliat  which  is  designed  to  serve  merely  specula- 
tive purposes  in  the  endeavor  to  make  a  profit  as  the  result 
of  fluctuations  which  have  been  planned  in  advance. 

The  first  kind  of  manipulation  has  certain  advantages, 
and  wIk^u  not  accompanied  by  '' matched  orders"  is  un- 
ol)jectionable  per  se.  It  is  essential  to  the  organization  and 
carrying  through  of  imi)ortant  enterprises,  such  as  largo 
corporations,  that  the  organizers  should  be  able  to  raise 
the  money  necessary  to  complete  them.  This  can  be  done 
onlv  bv  the  sale  of  securities.  Large  blocks  of  securities, 
such  as  are  frequently  issued  by  railroad  and  other  com- 
panies, cannot  be  sold  over  the  counter  or  directly  to  the 
ultimate  investor,  whose  confidence  in  them  can,  as  a  rule, 
be  o7ilv  gradually  established.  They  nmst,  theref(U*e,  if  sold 
at  nil,  I»t'  disposed  of  to  some  syndicate,  who  will  in  turn 
pass  tlicHi  f'H  1<>  uiiddlcUK'n  or  speculators,  until,  in  the 
course  of  tim(\  they  find  their  way  into  the  boxes  of  inves- 
tors. But  })rudent  investors  arc  not  likely  to  be  induci'il 
to  buy  securities  which  are  not  regularly  quoted  on  some 
exchange,  and  which  they  cannot  sell,  or  on  which  they  can- 
not borrow  money  at  their  pleasure.  If  the  securities  are 
really  good  and  bids  and  offers  bona  fide,  open  to  all  sellei-s 
aTul  buyers,  the  operation  is  harmless.  It  is  merely  a  method 
of  bri]iging  new  investments  into  ]niblic  notice. 

Till'  second  kind  of  manijudation  mentioned  is  undoubt- 
edly o])en  to  serious  cviticisui.  It  h;is  for  its  objoct  cither 
the  creation  of  high  ]iriccs  for  ])articular  stocks  in  order  to 
draw  in  the  ]iulilic  as  luiyers  and  t<»  unload  u]ion  them  the 
holdings  of  the  operators,  or  to  depress  the  prices  and  in- 


STOCK  MARKETS  AND  EXCHANGES         291 

duco  the  public  to  sell.  There  have  been  instances  of  gross 
and  unjustifiable  manipulation  of  securities,  as  in  the  case 
of  American  Ice  Stock.  While  we  have  been  unable  to  dis- 
cover any  complete  remedy  short  of  abolishing  the  Stock 
Exchange  itself,  we  are  convinced  that  the  Exchange  can 
prevent  the  worst  forms  of  this  evil  by  exercising  its  in- 
fluence and  authority  over  the  members  to  prevent  them. 
AVhen  continued  manipulation  exists  it  is  patent  to  expe- 
rienced observers. 

"Wash-Sales"  and  "Matched  Orders.** 

In  the  foregoing  discussion  we  have  confined  ourselves 
to  bona  fide  sales.  So  far  as  manipulation  of  either  class 
is  based  upon  fictitious  or  so-called  "wash-sales,"  it  is  open 
to  the  severest  condemnation,  and  should  be  prevented  by  all 
possible  means.  These  fictitious  sales  are  forbidden  by  the 
rules  of  all  the  regular  exchanges,  and  are  not  enforceable  at 
law.  They  are  less  frequent  than  many  persons  suppose.  A 
transaction  must  take  place  u^Don  the  floor  of  the  Exchange 
to  be  reported,  and  if  not  reported  does  not  serve  the  pur- 
pose of  those  who  engage  in  it.  If  it  takes  place  on  the 
floor  of  the  Exchange,  but  is  purely  a  pretense,  the  brokers 
Involved  run  the  risk  of  detection  and  expulsion,  which  is 
to  them  a  sentence  of  financial  death.  There  is,  however, 
another  class  of  transactions  called  "matched  orders,  "which 
differ  materially  from  those  already  mentioned,  in  that  they 
are  actual  and  enforceable  contracts.  "VYe  refer  to  that  class 
of  transactions,  engineered  by  some  manipulator,  who  sends 
a  number  of  orders  simultaneously  to  differnit  brokers, 
some  to  buv  and  some  to  sell.  These  brokers,  without  know- 
incf  that  other  brokers  have  countervailing  orders  from  the 
same  principal,  execute  their  orders  uj^on  the  floor  of  the 
Exchange,  and  the  transactions  become  binding  contracts; 
they  cause  an  appearance  of  activity  in  a  certain  security 
which  is  unreal.  Since  they  are  legal  and  binding,  we  find 
a  difficulty  in  suggesting  a  legislative  remedy.    But  where 


292         STOCK  MARKETS  AND  EXCHANGES 

the  activities  of  two  or  more  brokers  in  certain  securities 
become  so  extreme  as  to  indicate  manipulation  rather  than 
genuine  transactions,  the  officers  of  the  Exchange  would  be 
remiss  unless  they  exercised  their  influence  and  autliority 
upon  such  members  in  a  way  to  cause  them  to  desist  from 
such  suspicious  and  undesirable  activity.  As  already 
stated,  instances  of  continuous  manipulation  of  particular 
securities  are  patent  to  cvorv  experienced  obsen'er,  and 
could  without  difficulty  be  discouraired,  if  not  prevented,  by 
prompt  action  on  the  part  of  the  Exchange  authorities. 

Comers. 

The  subject  of  corners  in  the  stock  market  has  engaged 
our  attention.  The  Stock  Exchange  might  properly  adopt 
a  rule  providing  that  the  governors  shall  have  power  to  de- 
cide when  a  corner  exists  and  to  fix  a  settlement  price,  so 
as  to  relieve  innocent  persons  from  the  injury  or  ruin  which 
may  result  therefrom.  The  mere  existence  of  such  a  rule 
would  tend  to  prevent  corners. 

Failures  and  Examination  of  Books. 

We  have  taken  testimony  on  the  subject  of  recent  fail- 
ures of  brokers,  where  it  has  been  discovered  that  they  were 
insolvent  for  a  long  period  prior  to  the  public  declaration 
of  failure,  and  where  their  activities  after  their  insolvency 
not  only  caused  great  loss  to  their  customers,  but  also,  owing 
to  their  efforts  to  save  themselves  from  bankruptcy,  worked 
great  injury  to  innocent  outsiders.  For  cases  of  this  char- 
acter there  should  be  a  law  analogous  to  that  forbidding 
banks  to  accept  deposits  after  insolvency  is  known ;  and  we 
recommend  a  statute  making  it  a  misdemeanor  for  a  broker 
to  receive  any  securities  or  cash  from  any  customer  (except 
in  liquidating  or  fortifying  an  existing  account),  or  to  make 
any  further  purchases  or  sales  for  his  own  account,  after 
he  has  become  insolvent;  with  the  provision  that  a  broker 
shall  be  deemed  insolvent  when  he  has  on  his  books  an  ac- 


STOCK  MARKETS  AND  EXCHANGES         293 

count  or  accounts  which,  if  liquidated,  would  exhaust  his 
assets,  unless  he  can  show  that  he  had  reasonable  ground 
to  believe  that  such  accounts  were  good. 

The  advisability  of  requiring  bj^  State  authority  an  ex- 
amination of  the  books  of  all  members  of  the  Exchange, 
analogous  to  that  required  of  banks,  has  been  urged  upon  us. 
Doubtless  some  failures  would  be  prevented  by  such  a  sys- 
tem rigidly  enforced,  although  bank  failures  do  occur  in 
spite  of  the  scrutiny  of  the  examiners.  Yet  the  relations 
between  brokers  and  their  customers  are  of  so  confidential 
a  nature  that  we  do  not  recommend  an  examination  of  their 
books  by  any  public  authority.  The  books  and  accounts  of 
the  members  of  the  Exchange  should,  however,  be  subjected 
to  periodic  examination  and  inspection  pursuant  to  rules 
and  regulations  to  be  prescribed  by  the  Exchange,  and  the 
result  should  be  promptly  reported  to  the  governors  thereof. 

It  is  vain  to  say  that  a  body  possessing  the  powers  of  the 
board  of  governors  of  the  Exchange,  familiar  with  every  de- 
tail of  the  mechanism,  generally  acquainted  with  the  char- 
acteristics of  members,  cannot  improve  present  conditions. 
It  is  a  deplorable  fact  that  with  all  their  power  and  ability 
to  be  informed,  it  is  generally  only  after  a  member  or  a 
fiiTQ  is  overtaken  by  disaster,  involving  scores  or  hundreds 
of  innocent  persons,  and  causing  serious  disturbances,  that 
the  Exchange  authorities  take  action.  No  complaint  can  be 
registered  against  the  severity  of  the  punishment  then 
meted  out ;  but  in  most  cases  the  wrongdoing  thus  atoned 
for,  which  has  been  going  on  for  a  considerable  period,  might 
have  been  discovered  under  a  proper  system  of  supervision, 
and  the  vastly  preponderant  value  of  prevention  over  cure 
demonstrated. 

Rehypothecation  of  Securities. 

We  have  also  considered  the  subject  of  reh^-pothecating, 
loaning  and  other  use  of  securities  by  brokers  who  hold 
them  for  customers.     So  far  as  any  broker  applies  to  his 


294         STOCK  MARKETS  AND  EXCHANGES 

own  use  any  securities  belonging  to  a  customer,  or  hypoth- 
ecates them  for  a  greater  amount  tlian  the  unpaid  balance 
of  the  purchase  price,  without  the  customer's  consent,  he 
is  undoubtedlv  t^uiltv  of  a  conversion  under  the  law  as  it 
exists  today,  and  we  call  this  fact  to  the  attention  of  brokers 
and  the  public.  When  a  broker  sells  the  securities  |)ur- 
chased  for  a  customer  who  has  paid  therefor  in  whole  or 
in  part,  excejjt  upon  the  customer's  default,  or  disposes  of 
them  for  his  own  benefit,  he  should  be  held  guilty  of  larceny, 
and  we  recommend  a  statute  to  that  effect. 

Dealing  for  Clerks. 

The  Exchange  now  has  a  rule  forbidding  anv  member 
to  deal  or  carrv  an  account  for  a  clerk  or  emi)love  of  anv 
other  member.  This  rule  should  be  extended  so  as  to  pre- 
vent dealing  for  an  account  of  any  clerk  or  subordinate  em- 
ploye of  any  bank,  tinjst  company,  insurance  comjiany,  or 
other  moneyed  cori:)oration  or  banker. 

Listing  Requirements. 

Before  securities  can  be  bought  and  sold  on  the  Ex- 
change, they  must  be  examined.  The  committee  on  Stock 
List  is  one  of  the  most  important  ])arts  of  the  organization, 
since  public  confidence  depends  u])on  the  honesty,  im])ar- 
tiality,  and  thorijughness  of  its  W(»rk.  While  the  Exchange 
does  not  guarantee  the  character  of  any  securities,  or  alTii  in 
that  the  statements  filed  by  the  ])r(>moters  are  true,  it  certi- 
fies that  due  diligence  and  caution  have  been  used  by  ex- 
perienced men  in  examining  them.  Admission  to  the  list, 
therefore,  establishes  a  presum})tion  in  t'axor  of  the  sound- 
ness of  the  .security  so  admitted.  Any  securities  authorized 
to  be  bought  and  sold  on  the  Exchange,  which  have  not  been 
subjected  to  such  serutiny,  are  said  to  be  in  the  unlisted  de- 
partment, and  traders  who  deal  in  them  do  so  at  their  owti 
ri.sk.  We  have  given  consideration  to  the  subject  of  verify- 
iug  the  statements  of  fact  contained  in  the  papers  filed  with 


STOCK  MARKETS  AND  EXCHANGES         295 

the  applications  for  listing,  but  we  do  not  rcconnnond  that 
either  the  State  or  the  Exchange  take  such  responsi])ility. 
Any  attempt  to  do  so  would  undoubtedly  give  the  securities 
a  standing  in  the  eyes  of  the  public  which  would  not  in  all 
cases  be  justified.  In  our  judgment,  the  Exchange  should, 
however,  adopt  methods  to  compel  the  filing  of  frequent 
statements  of  the  financial  condition  of  the  companies  whose 
securities  are  listed,  including  balance  sheets,  income  and 
expense  accounts,  etc.,  and  should  notify  the  public  that 
these  are  open  to  examination  under  proper  rules  and  regu- 
lations. The  Exchange  should  also  require  that  there  be 
filed  with  future  applications  for  listing  a  statement  of  what 
the  capital  stock  of  the  company  has  been  issued  for,  show- 
ing how  much  has  been  issued  for  cash,  how  much  for  prop- 
erty, with  a  description  of  the  property,  etc.,  and  also  show- 
ing what  commission,  if  any,  has  been  paid  to  the  promo- 
ters or  vendors.  Furthermore,  means  should  be  adopted 
for  holding  those  making  the  statements  responsible  for  the 
truth  thereof.  The  unlisted  department,  except  for  tem- 
porary issues,  should  be  abolished. 

Fictitious  Trades. 

Complaint  is  made  that  orders  given  by  customers  are 
sometimes  not  actually  executed,  although  so  reported  by 
the  broker.  We  recommend  the  passage  of  a  statute,  pro- 
viding that,  in  case  it  is  pleaded  in  any  suit  by  or  against  a 
broker  that  the  purchase  or  sale  was  fictitious,  or  was  not 
an  actual  bona  fide  purchase  or  sale  by  the  broker  as  agent 
for  the  customer,  the  court  or  jury  shall  make  a  special  find- 
ing upon  that  fact.  Tn  case  it  is  found  that  the  purchase  or 
sale  was  not  actual  and  bona  fide,  the  customer  shall  recover 
three  times  the  amount  of  the  loss  which  he  sustained  there- 
by; and  copies  of  the  finding  shall  be  sent  to  the  district  at- 
torney of  the  county  and  to  the  Exchange,  if  the  broker  be 
a  member. 


296         STOCK  MARKETS  AND  EXCHANGES 

Unit  of  Trading. 

The  Exchange  should  insist  that  all  trading  be  done  on 
the  basis  of  a  reasonably  small  unit  (sav  100  shares  of  stock 
or  $1,000  of  bonds),  and  should  not  permit  the  offers  of  such 
lots,  or  bids  for  such  lots,  to  be  ignored  by  traders  offering 
or  bidding  for  larger  amounts.  The  practice  now  permitted 
of  allowing  bids  and  offers  for  large  amounts,  all  or  none, 
assist  the  manipulation  of  prices.  Thus  a  customer  may 
send  an  order  to  sell  100  shares  of  a  particular  stock  at  par, 
and  a  broker  mav  offer  to  buv  1,000  shares,  all  or  none,  at 
101,  and  yet  no  transaction  take  place.  The  bidder  in  such 
a  case  should  be  required  to  take  all  the  shares  offered  at 
the  lower  price  before  bidding  for  a  larger  lot  at  a  higher 
price.    This  would  tend  to  prevent  matched  orders. 

Stock  Clearing  House. 

"We  have  also  considered  the  subject  of  the  Stock  Ex- 
change Clearing  House.  \\'hile  it  is  undoubtedly  true  that 
the  clearing  of  stocks  facilitates  transactions  which  may 
be  deemed  purely  manipulative,  or  virtually  gambling  trans- 
actions, nevertheless  we  are  of  the  opinion  that  the  Ex- 
change could  not  do  its  necessary  and  l(\u:itimate  business 
but  for  the  existence  of  the  clearing  system,  and,  therefore, 
that  it  is  not  wise  to  abolish  it. 

The  transactions  in  stocks  which  are  cleared  are  trans- 
scribed  each  day  on  what  are  called  "clearing  sheets,"  and 
these  sheets  are  passed  into  the  Clearing  House  and  there 
filed  for  one  week  only.  In  view  of  the  value  of  these  sheets 
as  proving  the  transactions  and  the  prices,  they  should  be 
preserved  by  the  Exchange  for  at  least  six  years,  and  should 
be  at  the  disposal  of  the  courts,  in  case  of  any  dispute. 

Specialists. 

We  have  received  complaints  that  specialists  on  the  floor 
of  the  Exchange,  dealing  in  inactive  securities,  sometimes 


STOCK  MARKETS  AND  EXCHANGES         297 

buy  or  sell  for  their  own  account  while  acting  as  brokers. 
Such  acts  without  the  principal's  consent  are  illegal.  In 
every  such  case  recourse  may  be  had  to  the  courts. 

Notwithstanding  that  the  system  of  dealing  in  special- 
ties is  subject  to  abuses,  we  are  not  convinced  that  the  Eng- 
lish method  of  distinguishing  between  brokers  and  jobbers 
serves  any  better  purpose  than  our  own  practice,  while  its 
introduction  here  would  complicate  business.  It  should  also 
be  noted  that  the  practice  of  specialists  in  buying  and  sell- 
ing for  their  o^\ti  account  often  serves  to  create  a  market 
where  otherwise  one  would  not  exist. 

Branch  Offices. 

Complaint  has  been  made  of  branch  offices  in  the  city  of 
New  York,  often  luxuriously  furnished  and  sometimes 
equipped  with  lunch  rooms,  cards,  and  liquor.  The  ten- 
dency of  many  of  them  is  to  increase  the  lure  of  the  ticker 
by  the  temptation  of  creature  comforts,  appealing  thus  to 
many  who  would  not  otherwise  speculate.  The  governors  of 
the  Exchange  inform  us  that  they  realize  that  some  of  these 
offices  have  brought  discredit  on  the  Exchange,  and  that  on 
certain  occasions  they  have  used  their  powers  to  suppress 
objectionable  features.  It  seems  to  us  that  legitimate  inves- 
tors and  speculators  might,  without  much  hardship,  be  com- 
pelled to  do  business  at  the  main  offices,  and  that  a  hard- 
and-fast  rule  against  all  branch  offices  in  the  City  of  New 
York  might  well  be  adopted  by  the  Exchange.  In  any  event, 
we  are  convinced  that  a  serious  and  offoctivo  regulaticm  of 
these  branch  offices  is  desirable. 

Incorporation  of  Exchange. 

We  have  been  strongly  urged  to  recommend  that  the  Ex- 
change be  incorporated,  in  order  to  bring  it  more  completely 
under  the  authority  and  supervision  of  the  State  and  the 
process  of  the  courts.  Under  existing  conditions,  being  a 
voluntary  organization,  it  has  almost  unlimited  power  over 


298         STOCK  MARKETS  AND  EXCHANGES 

the  conduct  of  its  iiiciubers,  and  it  ran  subject  tliein  to  in- 
stant discipline  for  wroncj-doini^,  wliicli  it  could  not  exercise 
in  a  sulnmal'^■  manner  if  it  were  an  incorporated  bodv.  AVe 
think  that  such  ])ower  residing  in  a  properly  chosen  com- 
mittee is  distinctly  advantac^a'ous.  The  submission  of  such 
questions  to  the  courts  would  involve  delays  and  technical 
obstacles  which  would  im})air  discipline  without  securing 
anv  greater  measure  of  substantial  justice.  While  this  com- 
mittee  is  not  entirely  in  accord  on  this  point,  no  meml)er  is 
yet  prepared  to  advocate  the  incorporation  of  the  Kxchange 
and  a  majority  of  us  advise  against  it,  upon  the  ground  that 
the  advantages  to  be  gained  by  incorporation  may  be  ac- 
complished by  rules  of  the  Exchange  and  hy  statutes  aimed 
directly  at  the  evils  which  need  correction. 

The  Stock  Exchange  in  the  past,  although  frequently 
punisliing  infractions  of  its  rules  with  great  severity,  has, 
in  our  opinion,  at  times  failed  to  take  proper  measures  to 
prevent  wrongdoing.  This  has  been  probably  due  not  only 
to  a  conservative  miwillingness  to  interfei'e  in  the  business 
of  others,  but  also  to  a  spirit  of  comradeship  which  is  very 
marked  among  brokers,  and  frequently  leads  them  to  over- 
look misconduct  on  the  part  of  fellow-members,  although  at 
the  same  time  it  is  a  matter  of  cynical  gossip  and  conunent 
in  the  street.  The  public  has  a  right  to  expect  something 
more  than  this  from  the  Exchange  and  its  members.  This 
committee,  in  refraining  from  advising  the  incorporation  of 
the  Exchange,  does  so  in  the  ex]iectation  that  the  Exchange 
will  in  the  future  take  full  advantage  of  the  ]iowers  con- 
ferred ui)on  it  by  its  voluntary  organization,  and  will  be  ac- 
tive in  ])reventing  wrongdoing.  Then  we  believe  that  there 
will  be  no  serious  criticism  of  the  fact  tliat  it  is  not  incor- 
])orated.  If,  however,  wrongdoing  recui's,  and  it  a]»]H*ars  to 
the  public  at  large  that  the  Exchange  has  been  derelict  in 
exerting  its  ])owers  and  authority  to  ju'event  it,  we  believe 
that  the  ])ublic  will  insist  u]ion  the  incor]->oration  of  the  Ex- 
change and  its  subjection  to  state  authority  and  sujicrvision. 


STOCK  MARKETS  AND  EXCHANGES         299 

Wall  Street  as  a  Factor. 

There  is  a  tendeiiev  on  tlie  part  of  the  public  to  consider 
Wall  Street  and  the  New  York  Stock  Exchange  as  one  and 
the  same  thing.  This  is  an  error  arising  from  their  location. 
We  have  taken  pains  to  ascertain  what  proportion  of  the 
])nsiness  transacted  on  the  Exchange  is  furnished  by  New 
York  City.  Tlu^  only  reliable  sources  of  information  are 
the  books  of  the  commission  houses.  An  investigation  was 
made  of  the  transactions  on  the  Exchange  for  a  given  day, 
when  the  sales  were  1,500,000  shares.  The  returns  showed 
that  on  that  day  52  per  cent  of  the  total  transactions  on  the 
Exchange  apparently  originated  in  New  York  City,  and 
48  per  cent  in  other  localities. 

The  Consolidated  Stock  Exchange. 

Tlie  Consolidated  Exchange  was  organized  as  a  minmg 
stock  exchange  in  1875,  altering  its  name  and  business  in 
1886.  Although  of  far  less  importance  than  the  Stock  Ex- 
change, it  is  nevertheless  a  secondary  market  of  no  mean 
proportions;  by  far  the  greater  part  of  the  trading  Is  in  se- 
curities listed  upon  the  main  exchange,  and  prices  are  based 
upon  the  quotations  made  there.  The  sales  average  about 
45,000,000  shares  per  annum.  Tlie  fact  that  its  members 
make  a  specialty  of  ''broken  lots,"  i.  e.,  transactions  in 
shares  less  than  the  100  unit,  is  used  as  a  ground  for  the 
claim  that  it  is  a  serviceable  institution  for  investors  of  rel- 
atively small  means.  But  it  is  obvious  that  its  utility  as  a 
provider  of  ca]utal  for  enterprises  is  exceedingly  liuiited; 
and  that  it  affords  faeilities  for  the  most  injui-ious  form  of 
speculation — that  whieh  attracts  ]iersons  of  small  means. 

It  also  permits  dealing  in  shares  not  listed  in  the  main 
exchange,  and  in  certain  mining  shares  genei-ally  excluded 
from  the  other.  In  these  cases  it  prescribes  a  form  of 
listing  requirements,  but  the  original  listing  of  securities  is 
very  rarely  availed  of.    Tlie  rules  also  provide  for  dealing 


300         STOCK  MARKETS  AND  EXCHANGES 

in  grain,  petroleum,  and  other  products.  "Wheat  is,  how- 
ever, at  present  the  only  commodity  actively  dealt  in,  and 
this  is  due  solely  to  the  permission  to  trade  in  smaller  lots 
than  the  Produce  Exchange  unit  of  5,000  hushels. 

There  are  1,225  members,  about  450  active,  and  mem- 
berships have  sold  in  recent  years  at  from  $650  to  $2,000, 
In  general  the  methods  of  conducting  business  are  similar 
to  those  of  the  larger  exchange,  and  subject  to  the  same 
abuses. 

Very  strained  relations  have  existed  between  the  two 
security  exchanges  since  the  lesser  one  undertook  in  1886 
to  deal  in  stocks.  The  tension  has  been  increased  by  the 
methods  by  which  the  Consolidated  obtains  the  quotations 
of  the  other,  through  the  use  of  the  ''tickers"  conveying 
them.  It  is  probable  that  without  the  use  of  these  instru- 
ments the  business  of  the  Consolidated  Exchange  would  be 
paralyzed;  yet  the  right  to  use  them  rests  solely  upon  a 
technical  point  in  a  judicial  decision  which  enjoins  their 
removal. 

Holding  Companies. 

Connected  with  operations  on  the  Stock  Exchange  are  a 
class  of  manipulations  originating  elsewhere.  The  values 
of  railway  securities,  for  examjile,  depend  upon  the  man- 
agement of  the  companies  issuing  them,  the  directors  of 
which  may  use  their  power  to  increase,  diminish,  or  even 
extinguish  them,  while  they  make  gains  for  themselves 
by  operations  on  the  exchange.  They  may  advance  the 
price  of  a  stock  by  an  unexpected  dividend,  or  de])ress  it 
by  passing  an  expected  one.  Tliey  may  water  a  stock  by  is- 
suing new  shares,  with  no  proportionate  addition  to  the 
productive  assets  of  the  company,  or  load  it  with  indebt- 
edness, putting  an  unexpected  lien  on  the  shareholders' 
property.  Such  transactions  affect  not  only  the  fortunes 
of  the  shareholders,  who  are  designedly  kept  in  ignorance 
of  what  is  transpiring,  but  also  the  value  of  investments  in 


STOCK  IVIARKETS  AND  EXCHANGES         301 

other  similar  companies,  the  securities  of  which  are  affected 
s^^llpathetically.  Railroad  wrecking  was  more  common 
in  the  last  half  century  than  it  is  now,  but  we  have  some 
glaring  examples  of  it  in  the  debris  of  our  street  railways 
today. 

The  existence  and  misuse  of  such  powers  on  the  part  of 
directors  are  a  menace  to  corporate  property  and  a  temp- 
tation to  officials  who  are  inclined  to  speculate,  leadina; 
them  to  manage  the  property  so  as  to  fill  their  own  pockets 
by  indirect  and  secret  methods. 

A  liolding  company  represents  the  greatest  concentra- 
tion of  power  in  a  body  of  directors  and  the  extreme  of 
helplessness  on  the  part  of  shareholders.  A  corporation 
may  be  so  organized  that  its  bonds  and  preferred  stock 
represent  the  gi^eater  part  of  its  capital,  while  the  common 
stock  represents  the  actual  control.  Then,  if  a  second  com- 
pany acquires  a  majority  of  the  common  stock,  or  a  majority 
of  the  shares  that  are  likely  to  be  voted  at  elections,  it 
may  control  the  fonner  company,  and  as  many  other  com- 
panies as  it  can  secure.  The  shareholders  of  the  subsidiary 
companies  may  be  thus  practically  deprived  of  power  to 
protect  themselves  against  injurious  measures  and  even  to 
obtain  information  of  what  the  holding  company  is  doing, 
or  intends  to  do,  with  their  property. 

As  a  first  step  toward  mitigating  this  evil  we  suggest 
that  the  shareholders  of  subsidiary  companies,  which  are 
dominated  by  holding  companies,  or  voting  trusts,  shall 
have  the  same  right  to  examine  the  books,  records  and  ac- 
counts of  such  holding  companies,  or  voting  trusts,  that 
they  have  in  respect  of  the  companies  whose  shares  they 
hold,  and  that  the  shareholders  of  holding  companies  have 
the  same  right  as  regards  the  books,  records  and  accounts 
of  the  subsidiary  companies.  The  accounts  of  companies 
not  merged  should  be  separately  kept  and  separately  stat- 
ed to  their  individual  stockholders,  however  few  they  may 
be. 


302         STOCK  MARKETS  AND  EXCHANGES 

Wo  may  point  out  the  fact  that  the  powers  wliidi  ]i<»ld- 
ing  c()in])anies  now  exercise  were  never  contemplated,  or 
ima.2:ined,  when  joint-stock  corporations  were  first  legal- 
ized. If  P.irl lament  and  legislatures  had  forseen  their 
growth,  ihcy  W(»uld  June  erected  harriers  against  it. 

Receiverships. 

Our  attention  has  heen  directed  to  "the  well-known  ahus- 
es  frequently  accompanying  receiverships  of  large  cor- 
porations, and  more  esj^ecially  puhlic  service  corporations, 
and  the  issue  of  receivers'  certificates.  AVe  feel  that  the 
numerous  cases  of  long  drawn-out  receiverships,  in  some 
instances  lasting  more  than  ten  years,  and  of  the  issue 
of  large  amounts  of  receivers'  certificates  which  takc^  }>re- 
cedence  over  even  first  mortgage  bonds,  are  deserving  of 
most  serious  consideration. 

Legislation  providing  for  a  short-time  limitation  on 
receiverships,  or  for  a  limitation  of  receivers'  certificates 
to  a  small  percentage  of  the  mortgage  liens  on  the  pro})- 
ertv,  could  be  rendered  unnecessarv,  however,  bv  the  ac- 
tion  of  the  courts  themselves  along  these  lines,  so  as  to 
make  common  past  abuses  imi3ossibk'  in  the  future. 

Effects  of  the  Money  Market  on  Speculation. 

Tt  has  l)een  urged  that  vour  eoniniittee  consider  the  in- 
flueuee  of  the  money  market  upon  security  si>eculation. 

As  a  result  of  conditions  to  which  the  defects  of  our 
monetarv  and  banking  svstems  chieflv  contribute,  there 
is  frequently  a  congestion  of  funds  in  New  York  City,  when 
the  supi>ly  is  in  excess  of  Imsiness  needs  and  tlie  accumu- 
lated sur]dus  frrim  the  entire  country  generally  is  thereby 
set  free  for  use  in  Ihe  speculative  market.  Tluis  there  al- 
most annually  occurs  an  inordinately  low  rate  for  "call 
loans,"  at  times  less  than  one  per  cent.  During  the  prev- 
alence of  this  abnonnally  low  rate  speculation  is  unduly 
incited,  and  speculative  loans  are  very  largely  expanded. 


STOCK  MARKETS  AND  EXCHANGES         303 

On  the  other  hand,  occasional  extraordinary  industrial 
activity,  coupled  with  the  annually  recurring  demands  for 
money  during  the  crop-moving  season,  causes  money  strin- 
gency, and  the  calling  of  loans  made  to  the  stock  market;  an 
abnomially  high  interest  rate  results,  attended  by  violent 
reaction  in  speculation  and  al)ru]it  fall  in  prices.  The 
pressure  to  retain  funds  in  the  speculative  field  at  these 
excessivelv  hie;h  interest  rates  tends  to  a  curtailment  of 
reasonable  accommodation  to  commercial  and  manufac- 
turing interests,  frequently  causing  embarrassment  and  at 
times  menacing  a  crisis. 

The  economic  questions  involved  in  these  conditions 
are  the  subject  of  present  consideration  by  the  Federal 
authorities  and  the  National  ^lonetary  Commission.  They 
could  not  be  adjusted  or  adequately  controlled  either 
through  Exchange  regulation  or  State  legislation. 

The  Usury  Law. 

The  usury  law  of  this  State  prohibits  the  taking  of  more 
than  6  per  cent  interest  for  the  loan  of  money,  but  by  an 
amendment  adopted  in  1882  an  exception  is  made  in  the 
case  of  loans  of  $5,000  or  more,  payable  on  demand  and  se- 
cured by  collateral.  It  is  claimed  by  some  that,  since  this 
exception  enables  stock  speculators,  in  times  of  great 
stringency,  to  bon*ow  money  by  paying  excessively  high 
rates  of  interest,  to  the  exclusion  of  other  borrowers,  a  re- 
peal of  this  provision  would  check  inordinate  speculation. 
We  direct  attention,  however,  to  the  fact  that  the  statute 
in  question  excepts  such  loans  as  are  secured  by  warehouse 
receipts,  bills  of  lading,  bills  of  exchange,  and  other  nego- 
tiable instruments.  Hence,  its  operation  is  not  limited  to 
Stock  Exchange  transactions,  or  to  speculative  loans  in 
general,  ^loreover,  the  repeal  of  the  statute  would  affect 
only  the  conditions  when  high  rates  of  interest  are  exacted, 
Avhich  really  ]n'omote  excessive  speculation.  Finally,  our 
examination  indicates  that  prior  to  the  enactment  of  the 


304         STOCK  MARKETS  AND  EXCHANGES 

statute  of  1882  such  loans  were  negotiated  at  the  maximum 
(6  per  cent),  plus  a  commission,  which  made  it  equivalent 
to  the  higher  rate;  and  a  repeal  of  the  statute  would  lead 
to  the  resum]^ti.on  of  this  practice.  Therefore,  as  the  repeal 
would  not  be  beneficial,  we  cannot  recommend  any  legisla- 
tion bearing  ui)on  the  interest  laws  of  the  State  unless  it 
be  the  repeal  of  tlie  usury  law  nltogether,  as  we  believe  that 
money  will  inevitably  seek  the  point  of  highest  return 
for  its  use.  Tn  nine  states  of  the  Union  there  are  at  present 
no  usurv  laws. 

The  Curb  Market. 

There  is  an  unorganized  stock  market  held  in  the  open 
air  during  exchange  hours.  It  occupies  a  section  of  Broad 
Street.  An  enclosure  in  the  center  of  the  roadway  is  made 
by  means  of  a  rope,  within  which  the  traders  are  supposed 
to  confine  themselves,  leaving  space  on  either  side  for  the 
passage  of  street  traffic;  but  during  days  of  active  trading 
the  crowd  often  extends  from  curl)  to  curb. 

There  are  about  200  subscribers,  of  whom  ])rol)ably  150 
appear  on  the  curb  each  day,  and  the  machinery  of  the  op- 
erations requires  the  presence  of  as  many  messenger  boys 
and  clerks.  Such  obstruction  of  a  public  thoroughfare  is 
obviously  illegal,  but  no  attempt  has  been  made  by  the 
city  authorities  to  disperse  the  crowd  that  habitually  as- 
sembles there. 

This  open-ail'  market,  we  understand  is  dependent  for 
the  great  bulk  of  its  l)usiness  upon  members  of  the  Stock 
Exchange,  a])])7-oxiniately  85  per  cent  of  the  orders  execu- 
ted on  the  curb  coming  from  Stock  Exchange  houses.  The 
Exchange  itself  keeps  the  curb  market  in  the  street,  since 
it  forbids  its  own  members  engaging  in  any  transaction 
in  anv  other  securitv  exchange  in  New  York.  If  the  curb 
were  put  under  a  roof  and  organized,  this  trading  could  not 
be  maintained. 


STOCK  MARKETS  AND  EXCHANGES         305 

Its  Utility. 

The  curb  market  has  existed  for  upwards  of  thirty  years, 
but  only  since  the  great  development  of  trading  in  secu- 
rities began,  about  the  year  1897,  has  it  really  become  im- 
portant. It  affords  a  public  market  place  where  all  per- 
sons can  buy  and  sell  securities  which  are  not  listed  on  any 
organized  exchange.  Such  rules  and  regulations  as  exist 
are  agreed  to  by  common  consent,  and  the  expenses  of 
maintenance  are  paid  by  voluntary  subscription.  An  agen- 
cy has  been  established  by  common  consent  through  which 
the  lilies  and  regulations  are  prescribed. 

This  agency  consists  solely  of  an  individual  who, 
through  his  long  association  with  the  curb,  is  tacitly  ac- 
cepted as  arbiter.  From  this  source  we  learn  that  sales 
recorded  dunng  the  year  1908  were  roughly  as  follows: 

Bonds   .....' $66,000,000 

Stocks,  industrials,  shares 4,770,000 

Stocks,  mining,  shares 41,825,000 

Official  quotations  are  issued  daily  by  the  agency  and 
appear  in  the  public  press.  Corporations  desiring  their  se- 
curities to  be  thus  quoted  are  required  to  afford  the  agency 
certain  information,  which  is,  however,  superficial  and  in- 
complete. There  is  nothing  on  the  curb  which  corresponds 
to  the  listing  process  of  the  Stock  Exchange.  The  latter, 
while  not  guaranteeing  the  soimdness  of  the  securities, 
gives  a  prima  facie  character  to  those  on  the  list,  since  the 
stock  list  committee  takes  some  pains  to  learn  the  truth. 
The  decisions  of  the  agent  of  the  curb  are  based  on  insuffi- 
cient data,  and  since  much  of  the  work  relates  to  mining 
schemes  in  distant  states  and  territories,  and  foreign  coun- 
tries, the  mere  fact  that  a  security  is  quoted  on  the  curb 
should  create  no  presumption  in  its  favor;  quotations  fre- 
quently represent  ''wash  sales,"  thus  facilitating  enter- 
prises. 


B.VII— 20 


306         STOCK  MARKETS  AND  EXCHANGES 

Evils  of  Unorganized  Status. 

Bitter  complaints  have  reached  us  of  frauds  perpetrated 
upon  confiding  jiersons,  who  have  been  induced  to  purchase 
mining  shares  because  they  are  quoted  on  the  curb;  these 
are  frequently  advertised  in  newspapers  and  circulars  sent 
through  the  mails  as  so  quoted.  Some  of  these  swindles 
liave  been  traced  to  their  fountain-heads  bv  the  Post  Office 
I)ei>artnient,  to  which  complaint  has  been  made;  but  usu- 
ally the  swindler,  when  cornered,  has  settled  privately 
with  the  individual  complainant,  and  then  the  prosecution 
has  failed  for  want  of  testimony.  ^leanwhile  the  same  op- 
erations may  continue  in  many  other  places,  till  the  swindle 
becomes  too  notorious  to  be  profitable. 

Notwithstanding  the  lack  of  proper  supervision  and 
control  over  the  admission  of  securities  to  the  privilege  of 
quotation,  some  of  them  are  meritorious,  and  in  this  partic- 
ular the  curb  performs  a  useful  function.  The  existence  of 
the  cited  al)uses  does  not,  in  our  judgment,  demand  tlie 
abolition  of  the  curb  market.  Regulation  is,  however,  im- 
perative. To  require  an  elaborate  organization  similar  to" 
that  existing  in  the  exchanges  would  result  in  the  foiina- 
tion  of  another  curb  free  from  such  restraint. 

As  has  been  stated,  about  85  per  cent  of  the  l)usiness  of 
the  curb  comes  through  the  offices  of  members  of  the  New 
York  Stock  Exchange,  but  a  provision  of  the  constitution 
of  that  Exchange  prohibits  its  members  from  liecoming 
members  of,  or  dealing  on  any  other  organized  Stock  Ex- 
change in  New  Y(U'k.  Accordincrly,  operatoi^s  on  the  curb 
market  have  not  att(>m]")ted  to  form  an  organization.  The 
attitude  of  the  Stock  Exchange  is  therefore  largely  respon- 
sil)le  for  the  existence  of  sucli  abuses  as  result  from  the 
want  of  organization  of  the  curl)  market.  The  brokers 
dealing  on  tlie  latter  do  not  wish  to  lose  their  best  custom- 
ers, and  hence  they  submit  to  these  irregularities  and  in- 
conveniences. 


STOCK  MARKETS  AND  EXCHANGES         307 

Some  of  the  members  of  the  Exchange  dealing  on  the 
curb  have  apparently  been  satisfied  with  the  prevailing 
conditions,  and  in  their  own  selfish  interests  have  main- 
tained an  attitnde  of  indifference  toward  abnses.  We  are 
informed  that  some  of  the  most  flagrant  cases  of  discred- 
itable enterprises  finding  dealings  on  the  cnrb  were  pro- 
moted by  members  of  the  New  York  Stock  Exchange. 

Reformation  of  the  Curb. 

The  present  apparent  attitude  of  the  Exchange  toward 
the  curb  seems  to  us  clearly  inconsistent  with  its  moral  ob- 
ligations to  the  community  at  large.  Its  governors  have 
freqTU'utly  avowed  before  this  committee  a  purpose  to  co- 
operate to  the  greatest  extent  for  the  remedy  of  any  evils 
found  to  exist  in  stock  speculation.  The  cm'b  market  as  at 
present  constituted  aft"(U-ds  amj^le  opportunity  for  the  ex- 
ercise of  such  helpfulness. 

The  Stock  Exchange  should  compel  the  formulation  and 
enforcement  of  such  rules  as  may  seem  proper  for  the  regu- 
lation of  business  on  the  curb,  the  conduct  of  those  dealing 
thereon,  and,  particularly,  for  the  admission  of  securities 
to  quotation. 

If  the  curb  brokers  were  notified  that  failure  to  comply 
with  such  requirements  would  be  followed  by  an  applica- 
tion of  the  rule  of  non-intercourse,  there  is  little  doubt  that 
the  orders  of  the  Exchange  would  be  obeyed.  The  exist- 
ing connection  of  the  Exchange  gives  it  am]^le  power  to  ac- 
complish this,  and  we  do  not  suggest  anything  implying 
a  more  intimate  connection. 

Under  such  regulation,  the  curl)  market  might  be  de- 
cently housed  to  the  relief  of  its  members  and  the  general 
pul)Iic. 

The  Abuse  of  Advertising. 

A  large  part  of  the  discredit  in  the  public  mind  attach- 
ing to  "Wall  Street"  is  due  to  frauds  perpetrated  on  the 


308         STOCK  MARKETS  AND  EXCHANGES 

small  investor  throughout  the  country  in  the  sale  of  worth- 
less securities  bv  means  of  allurins:  circulars  and  adver- 
tisements  in  the  newspapers.  To  the  success  of  such  swin- 
dling enterprises  a  portion  of  the  press  contributes. 

Papers  which  honestly  try  to  distinguish  between  swin- 
dling advertisements  and  others,  may  not  in  every  instance 
succeed  in  doing  so;  but  readiness  to  accept  advertisements 
which  are  obviously  traps  for  the  unwary  is  evidence  of  a 
moral  delinquency  which  should  draw  out  the  severest  pub- 
lic condemnation. 

So  far  as  the  press  in  the  large  cities  is  concerned  the 
correction  of  the  e^il  lies,  in  some  measure,  in  the  hands  of 
the  reputable  bankei*s  and  brokers,  who,  by  refusing  their 
advertising  patronage  to  newspapers  notoriously  guilty  in 
this  respect,  could  compel  them  to  mend  their  ways,  and  at 
the  same  time  prevent  fraudulent  schemes  from  deriving 
an  appearance  of  merit  by  association  with  reputable 
names. 

Another  serious  evil  is  committed  by  men  who  give 
standing  to  promotions  by  serving  as  directors  without  full 
knowledge  of  the  affairs  of  the  companies,  and  by  allowing 
their  names  to  appear  in  prospectuses  without  knowing  the 
accuracy  and  good  faith  of  the  statements  contained  there- 
in. Investors  naturally  pay  great  regard  to  the  element  of 
personal  character,  both  in  the  offering  of  securities  and  in 
the  management  of  corporations,  and  can  therefore  be  de- 
ceived by  the  names  used  in  unsound  promotions. 

British  System  Considered. 

We  have  given  much  attention  to  proposals  for  com- 
pelling registration,  by  a  bureau  of  the  State  government, 
of  all  corporations  whose  securities  are  offered  for  public 
sale  in  this  State,  accompanied  by  information  regarding 
their  financial  responsibility  and  prospects,  and  prohibiting 
the  public  advertisement  or  sale  of  such  securities  without  a 
certificate  from  the  bureau  that  the  issuing  company  has 


STOCK  MARKETS  AND  EXCHANGES         309 

been  so  registered.  The  object  of  such  registration  would  be 
to  identify  the  promoters,  so  that  they  might  be  readily  pros- 
ecuted in  case  of  fraud.  Such  a  svstem  exists  in  Great 
Britain.  The  British  "Companies  Act''  provides  for  such 
registration,  and  the  "Directors'  Liability  Act"  regulates 
the  other  evil  referred  to  above.  Some  members  of  your 
committee  are  of  the  opinion  that  these  laws  should  be 
adopted  in  this  country,  so  far  as  they  will  fit  conditions 
here. 

This  would  meet  with  some  difficulties,  due  in  part  to 
our  multiple  system  of  State  government.  If  the  law  were 
in  force  only  in  this  State,  the  advertisement  and  sale  of  the 
securities  in  question  would  be  unhindered  in  other  mar- 
kets, and  companies  would  be  incorporated  in  other  States, 
in  order  that  their  directors  and  promoters  should  escape 
liability.  The  certificate  of  registration  might  be  accepted 
by  inexperienced  persons  as  an  approval  by  State  author- 
ity of  the  enterprise  in  question.  For  these  reasons  the 
majority  of  your  committee  does  not  recommend  the  reg- 
ulation of  such  advertising  and  sale  by  State  registration. 

In  so  far  as  the  misuse  of  the  post  office  for  the  distribu- 
tion of  swindling  circulars  could  be  regulated  by  the  Fed- 
eral authorities,  the  officials  have  been  active  in  checking 
it.  They  inform  us  that  vendors  of  worthless  securities 
are  aided  materially  by  the  opportunity  to  obtain  fictitious 
price  quotations  for  them  on  the  New  York  Curb  market. 

Legislation  Recommended. 

For  the  regulation  of  the  advertising  evils,  including 
the  vicious  "tipster's"  cards,  we  recommend  an  amendment 
to  the  Penal  Code  to  provide  that  any  person  who  adver- 
tises, in  the  public  press  or  other^vise,  or  publishes,  distrib- 
utes or  mails,  any  prospectus,  circular  or  other  statement 
in  regard  to  the  value  of  any  stock,  bonds,  or  other  secu- 
rities, or  in  regard  to  the  business  affairs,  property,  or  finan- 
cial condition  of  any  corporation,  joint-stock  association, 


310        STOCK  MARKETS  AND  EXCHANGES 

copartiuTship  nr  iiidividual  issuing  stuck,  bonds,  vv  other 
similar  secnriti<'S,  which  contains  anv  statement  of  fact 
vvhicli  is  known  t(>  such  person  to  be  false,  or  as  to  which 
such  person  lias  no  reasonable  grounds  for  believing  it  to  ])e 
true,  or  any  promises  or  predictions  which  he  cannot  reason- 
ably justify,  shall  be  guilty  of  a  misdemeanctr;  and,  further, 
that  every  newspaper  or  other  publication  printing  or  pub- 
lishing such  au  advertisement,  prospectus,  circular,  or  oth- 
er statement,  shall,  before  printing  or  })ublishing  the  same, 
obtain  from  the  person  responsible  for  the  same,  and  retain, 
a  written  and  signed  statement  to  the  effect  that  such 
person  accepts  resjX)nsil)ility  for  the  same,  and  for  the 
statements  of  fact  contained  therein,  which  statement  shall 
give  the  address,  with  street  numl)er,  of  such  person;  and 
that  the  publisher  of  any  such  newspaper  or  other  publica- 
tion which  shall  fail  to  o])tain  and  retain  such  statement 
shall  be  guilty  of  a  misdemeanor. 

Bucket-Shops. 

Bucket-shops  are  ostensibly  brokerage  offices,  where, 
however,  commodities  and  securities  are  neither  bought 
nor  sold  in  jjursuance  of  customers'  orders,  the  transac- 
tions being  closed  by  the  payment  of  gains  or  losses,  as  de- 
termined by  price  quotations.  In  other  words,  they  are 
merely  places  for  the  registration  of  bets  or  wagers;  their 
machinery  is  generally  controlled  by  the  keepers  who  can 
delay  or  manipulate  the  quotations  at  will. 

The  law  of  this  State,  which  took  effect  September 
1,  H>ns,  makes  the  keei)ing  of  a  bucket-shoj)  a  fehmy.  ]mu- 
isha)>le  by  fine  and  im])risoinuent,  and  in  the  case  of  coi-- 
porations,  on  second  olfenses  l)y  dissolution  or  ex])ulsion 
from  the  State.  Tn  ihe  case  of  individuals  Ihe  ]K'nalty  for 
a  second  offense  is  the  same  as  for  the  first.  These  penal- 
ties are  imposed  up<tn  the  theory  that  the  ]>i"actice  is  gam- 
bling ;  but  in  order  to  establish  the  fact  of  gambling  it  is  nec- 
essary, under  the  New  York  law,  to  show  that  both  parties 


STOCK  MARKETS  AND  EXCHANGES        311 

to  the  trade  intended  that  it  should  l)e  settled  by  the  pay- 
ment of  differences,  and  not  by  delivery  of  property.  Un- 
der the  law  of  Massachusetts  it  is  necessary  to  show  only 
that  the  bucket-shop  keeper  so  intended.  The  Massachu- 
setts law  provides  heavier  penalties  for  the  second  offense 
than  for  the  first,  and  makes  it  a  second  offense  if  a  bucket- 
shoj)  is  kept  open  after  the  first  conviction. 

Amendment  of  Law  Recommended. 

AYe  recommend  that  the  foregoing  features  of  the  Massa- 
chusetts law  be  adopted  in  this  State;  also  that  section  355 
of  the  act  of  1908  be  amended  so  as  to  require  brokers  to 
furnish  their  customers  in  all  cases,  and  not  merely  on  de- 
mand, the  names  of  brokers  from  whom  shares  were  bought 
and  to  whom  they  were  sold;  and  that  the  following  section 
be  added  to  the  act: 

AYitness  's  privilege : 

No  person  shall  be  excused  from  attending  and  testify- 
ing, or  producing  any  books,  papers,  or  other  documents 
before  any  court  or  magistrate,  upon  any  trial,  investiga- 
tion, or  proceeding  initiated  by  the  district  attorney  for  a 
violation  of  any  of  the  provisions  of  this  chapter,  upon  the 
ground  <»i-  for  the  reason  that  the  testimony  or  evidence, 
documcntai'v  or  otherwise,  required  of  him  may  tend  to 
convict  him  of  a  crime  or  subject  him  to  a  penalty  or  for- 
feiture; but  no  person  shall  ])c  prosecuted  or  sul^jected  to 
any  forfeiture  for  or  on  account  of  any  transaction,  matter, 
or  thing  concerning  whicli  he  may  so  testify  or  produce  ev- 
idence, documentary  or  otherwise,  and  no  testimon}'  so 
given  or  produced  shall  be  received  against  him  upon  any 
criminal  investigation  or  proceeding. 

There  has  been  a  sensible  diminution  in  the  number  of 
bucket-shops  in  New  York  since  the  act  of  1908  took  effect. 

Continuous  quotations  of  prices  from  an  exchange  are 
indispensable  to  a  bucket-shop,  and  when  such  quotations 
are  cut  off  this  gamljling  ends. 


CLASSIFICATION  OF  BONDS.* 

BY  FREDERICK  LOWNHAUPT. 

[  From   Lownhaupl'i  "Investment   Bonds."] 

American  financiers  have  often  been  under  necessity  of 
producing  a  security  with  new  and  attractive  features. 
At  times  distinctive  and  peculiar  conditions  have  had  to 
be  met.  With  characteristic  ingenuity  they  have  usually 
succeeded,  in  consequence  of  which  there  is  now  a  diversity 
of  securities  that  quite  demand  close  study  for  a  full  ap- 
preciation of  their  scope  and  nature.  Great  coi-porate 
needs  have  produced  volume,  coincident  with  which  have 
been  developed  two  characteristics  of  the  bond  branch  of 
the  security  market,  variety  and  novelty.  The  average 
investor  is  perplexed  to  distinguish  various  issues  so  he 
may  make  a  conservative  judgment.  He  is  not  alone. 
Many  another,  though  familiar  with  finance,  is  nonplussed 
to  make  a  clear  and  comprehensive  classification.  Some 
difficulty  arises  from  difference  of  name  where  the  issues 
are  identical  with  the  exception  of  some  unimportant  fea- 
ture. When  the  chief  characteristic  or  some  distinctive 
feature  is  taken  as  a  basis,  the  task  is  comparatively  easy; 
but  beyond  such  general  distinctions  classification  becomes 
somewhat  involved.  Several  are  used  by  financial  writers, 
differing  in  detail  yet  built  upon  ]iractically  the  same  foun- 
dation. All  are  essentially  correct.  Indeed  it  is  impos- 
sible to  make  an  arrangement  of  bonds  admitting  of  no 
variation. 

The  most  general  is  to  group  them  under  one  or  the 
other  of  two  heads,  namely,  Mortgage  and  Debenture 
bonds.  Enlarging  somewhat  upon  this  they  are  grouped 
as  ^lortgage,  Equipment,  Land  Grant,  Collateral  Trust, 
Prior  Lien,  Debenture  and  Income,  which  is  about  the 


•Courtesy   of    Messrs.    G.    P.  Putnam's  Sons. 

312 


CLASSIFICATION  OF  BONDS  313 

greatest  number  of  general  groups  practicable;  a  finer  divi- 
sion immediately  emphasizes  distinctions  of  individual  is- 
sues. Prom  a  market  point  of  view  solely,  bonds  and  fund- 
ed investments  are  often  put  into  three  divisions,  railway, 
industrial,  and  miscellaneous.  From  this  same  point  of 
view,  under  miscellaneous  bonds  are  included  industrial 
issues  and  so  making  this  division  to  consist  of  issues  of 
foreign  governments,  public  service  corporations  and  in- 
dustrial companies.  The  present  classification  proceeds 
differently  by  presenting  the  bonds  arranged  under  cor- 
porate groups  and  then  considering  the  individual  issues. 

Before  discussing  the  bonds  it  is  expedient  to  consider 
the  issuing  cor])oi'ations,  with  a  brief  inquiry  into  their  na- 
ture and  classification.  Though  not  prerequisite  to  an  un- 
derstanding of  the  subject  such  general  knowledge  con- 
tributes measurably  toward  a  clear  conception  of  the  nature 
and  functions  of  the  various  bonds.  It  is  important  to 
know  in  what  division  each  corporation  lies  and  in  a  general 
way  what  t^^oes  of  bonds  it  issues. 

Of  corporations  there  are  three  kinds:  Public,  Quasi- 
Public,  and  Private,  their  names  indicating,  in  a  measure, 
their  functions.  The  public  corporation,  very  generally 
called  municipal,  is  a  political  division  empowered  by  law 
to  do  such  acts  as  are  necessary  for  the  well  being  and  ad- 
vancement of  the  commonwealth ;  its  particular  functions 
are  many  and  it  is  conducted  for  no  gain  save  the  public 
good;  its  operations  are  limited  to  the  territory  over  which 
it  has  jurisdiction  and  its  officers  are  largely  elected  by 
its  citizens.  Municipal  corporations  are  classified  by  law, 
generally  according  to  population  and  assessed  valuation, 
and  their  powers  are  defined  according  to  class.  Cities 
and  counties  are  representative  examples.  The  private 
corporation  is  exactly  the  opposite;  it  is  formed  for 
pecuniary  gain  and  its  activities  may  be  universal;  it  gets 
its  being  and  powers  from  the  law,  and,  when  not  violating 
its  provisions,  is  not  amenable  in  any  sense.    In  organiza- 


314  FREDERICK  LOWNHAUPT 

tion  and  operation  it  is  entirely  different  from  tlie  pul)lic 
corporation  and  is  typified  in  a  mannfaeturin^^  company. 
Quasi-])nl)lic  corporations  partake  of  the  nature  of  Ixtth 
l>ul)]ic  and  private,  thon,i,di  in  law  they  are  considered  as 
of  the  latter  kind.  Tlieir  services,  nevertheless,  are  es- 
sentially ])nl)lie— hence,  the  classification.  Formed 
})rimarily  for  private  gain,  they  have  rights  that  are  strictly 
private  and  hevond  legislative  control,  vet  thev  mav  be  sub- 
jected  to  consideral)le  regulation  ])y  State  and  Federal 
authorities.  The  steam  railroads  and  public  service  cor- 
])orations  fall  in  this  categor}^  Of  those  corporations  other 
than  iniblic,  there  are  manv  whose  status  is  not  vet  clearlv 
and  finally  defined,  since  auth<»rities  on  the  subject  are 
divided.  The  best  legal  minds  are  far  from  unanimous 
on  the  identity  of  some  corporations  in  so  far  as  it  is  fixed 
by  their  functions.  Whether  these  functions  are  private 
or  quasi-public  is  a  mooted  question.  With  this  as  a  safe 
])asis,  investment  bonds  mav  be  classified  first  l)v  two  great 
general  divisions,  putting  into  one  those  issued  by  public 
corporations  and  into  the  other  those  issued  by  ]n'ivate  and 
quasi-] )ublic  roi-] (orations. 

Municipal  and  State. 

Considering  these  general  divisions,  in  the  first  we  find 
three  classes  under  which  may  be  grouped,  liowcvci-  desig- 
nated by  name,  all  of  such  securities  issued  Ity  ])ul»Iic  cor- 
I)orations,  I^ci-y  municipality  is  under  the  necessity  of 
maintaining  juiblic  works  and  making  im))rovements,  such 
as  building  (A'  1  (ridges,  sewers,  and  waterworks  U)  finance 
which  it  is  generally  necessary  to  issue  bonds.  Part  of  this 
funded  (lel)t  is  often  known  as  cor])orate  stodc  which  is 
onlv  those  long-term  Ixnids  issued  for  iK'iinanent  im- 
])rovements  in  distincti(>n  to  the  assessment  bonds  issued 
to  provide  funds  for  all  woi'k  done  by  contract,  the  ex- 
pense of  which  is  to  be  collected  by  assessment  from  ])rop- 
ertv  benefited  b\-   the   work.     Likewise  everv  State  has 


CLASSIFICATION  OF  BONDS  315 

similar  duties;  additional  liii2;li\vays  may  be  needed — a  canal 
may  be  demanded  l)y  business  conditions — the  require- 
ments for  educational  purposes  may  be  enlarii;in.2^,  for  all 
of  which,  after  the  proper  legislative  authorization,  the 
funds  are  usually  provided  by  an  issue  of  bonds. 

Federal  Government. 

The  Federal  Government,  too,  has  many  matters  to  look 
after.  Its  duties  are  all  public,  of  course,  but  their  scope 
is  much  broader.  It  must  finance  such  projects  as  are 
authorized  by  proper  legislation.  Building  a  canal  such 
as  the  Panama,  for  instance,  would  generally  be  financed 
by  bond  issue,  as  would  the  prosecution  of  a  war.  The 
general  acceptation  of  the  tenn  ''municipal"  as  ap])lied 
to  bonds,  contemplates  those  minor  civil  divisions  smaller 
than  a  state,  although,  strictly  speaking,  all  public  cor- 
porations are  municipal. 

Industrial,  Railroad,  Public  Service. 

Tn  the  second  general  division,  private  and  quasi-]">ublic 
Corporations,  there  are  a  greater  number  of  classes.  Every 
progressive  manufacturing  company  has  need  for  a  new 
capital  from  time  to  time;  growth  of  business  means  en- 
largement of  plant  or  acquirement  of  other  plants.  To 
finance  these  operations,  in  part  at  least,  bond  issues  are 
often  made.  Consolidation  and  extension  of  the  great  net 
work  of  steam  railways  throughout  this  country  jn-oduces 
great  amounts  of  bonds;  the  railways  unceasingly  increase 
their  mileage  and  improve  their  facilities.  Numerous  trac- 
tion lines,  which  operate  largely  in  cities,  also  produce 
a  considerable  amount  of  bonds.  The  marvellous  develop- 
ment of  electric  motive  power  has  given  a  great  stinudus 
to  this  form  of  enten')rise,  and  much  of  the  necessary 
capital  is  obtained  through  ]>ond  issue.  Another  source 
from  which  many  bonds  are  put  into  the  market  are  public 
service  coi-porations.     The  rapid  growth  of  the  country 


316  FREDERICK  LOWNHAUPT 

necessitates  installation  of  public  utilities  everywhere,  and 
accordingly  new  waterworks  are  built,  new  gas,  electric, 
and  power  plants  are  constructed  and  telephone  facilities 
extended.  The  call  for  funds  in  this  direction  is  largely 
met  bv  issue  of  this  kind  of  security.  Still  other  bonds,  al- 
though  comparatively  few,  are  placed  on  the  market — those 
issued  by  navigation  lines  whose  needs  are  similar  t<»  those 
of  other  transportation  companies  in  the  way  of  new  equip- 
ment, new  and  larger  terminals,  etc.,  and  which  are  pro- 
vided to  some  extent  bv  bond  issues. 

Improvement,  Equipment. 

Considering  issues  individually,  some  are  found  to  be  the 
natural  product  of  the  growth  of  corporations.  Any  cor- 
poration may  issue  a  type  of  improvement  bond  to  finance 
specific  or  general  permanent  improvements  and  if  there  is 
definite  security,  a  condition  wholly  dependent  upon  the 
kind  of  corporation,  it  generally  takes  the  fonn  of  an  en- 
cumbrance on  the  property  benefited.  The  railroads  are 
practically  alone  in  issue  of  what  are  kno\\Ti  as  extension 
and  construction  bonds,  both  of  which  finance  the  building 
of  new  trackage,  and  are  usually  secured  by  a  first  mortgage 
on  the  property  created;  their  issue  is  progressive  with  the 
work.  Again  railroads  often  buy  up  other  railroad  prop- 
erties and  sometimes  need  more  land  for  terminals.  An  is- 
sue of  purchase  money  bonds  may  be  made,  secured  by  a 
lien  on  the  property  obtained.  This  acquired  ju'operty 
may  have  a  debt,  and  where  such  is  the  case,  the  purchaser 
usually  provides  for  it.  However,  this  is  not  exclusively 
a  railroad  type  although  practically  all  of  this  name  have 
come  from  that  source.  It  is  frequently  necessary  for  a 
railroad  to  increase  the  number  of  its  cars  to  care  for  grow- 
insr  business,  and  there  mav  be  no  other  available  means 
of  obtaininc:  necessarv  funds  save  through  an  issue  of  "Car- 
Trust"  or  equipment  bonds.  Strictly  speaking,  a  *' Car- 
Trust"  bond  (or  certificate,  as  it  is  sometimes  kno^^-n),  is 


CLASSIFICATION  OF  BONDS  317 

an  obligation  issued  by  a  concern  known  as  a  car  trust. 
Its  security  is  the  cars,  which  have  been  purchased  from  a 
manufacturing  company  and  rented  to  a  railroad  company 
until  full  payment  is  made,  periodical  payments  being  pro- 
vided for,  which  go  to  make  payments  on  the  bonds.  The 
equipment  obligation  differs  in  that  it  is  not  issued  by  a 
car  trust  and  is  somewhat  broader  in  scope,  including,  as 
it  may,  locomotives,  boats,  etc.  This  distinction  should  be 
remembered  for  yet  another  reason,  and  that  is,  that  equip- 
ment bonds  are  not  necessarily  railroad  issues:  a  manu- 
facturing company  may,  quite  as  well,  put  out  such  bonds 
to  purchase  machinery  and  equipment. 

Founders,  Mortgage,  Refunding. 

A  bond  rarely  used  in  this  country  but  quite  well  known 
abroad  is  termed  founders.  It  is  generally  given  to  the 
promoters  of  an  enterprise  in  the  nature  of  a  bonus  in  a 
similar  manner  that  stock  is  given  in  this  country. 
Technicallv,  it  mav  be  considered  more  as  stock  than  as  a 
bond  though  it  is  often  designated  by  the  latter  term.  Ac- 
companying the  imiversal  tendency  toward  corporate  con- 
solidation has  come  the  necessity  of  bond  issues  adapted 
to  this  condition.  To  this  end  we  have  such  securities  as 
general  mortgage  bonds  which  may  be  issued  by  any  cor- 
poration other  than  public  and  are  generally  secured  by 
a  lien  on  the  property  in  its  entirety.  In  scattered  in- 
stances they  constitute  a  first  lien;  but  are  gencrallv  sub- 
ject to  some  prior  liens.  Akin  to  this  are  consolidated  and 
^'Blanket"  mortgage  bonds.  The  former  usually  puts  a 
new  security  on  an  entire  group  of  properties  already  fully 
covered  individuallv  and  while  therefore  secured  bv  a 
mortgage  on  all  the  properties,  this  lien  too  is  generally 
subject  to  some  of  prior  right.  Scarcely  any  distinction 
is  to  be  made  between  the  so-called  "Blanket"  mortgage 
bond  and  the  two  others  just  mentioned.  The  term  is 
generic  m  its  significance  and  whenever  used,  which  is 


318  FREDERICK  LOWNHAUPT 

seldom,  is  little  else  than  synonymous — it  may  aptly  de- 
scribe either  of  the  otheis.  In  the  issue  oi"  such  c(»mpre- 
honsivc  ni()rt,ii:a.i::os  provision  is  almost  invariably  made  for 
ret'unclin;^  other  issues  as  they  mature,  these  issues  being 
much  smaller  and  generally  a  i)rior  lien  and  being  provided 
for  l)y  an  ai-rangcnicnt  lor  their  exchange  for  the  proper 
amount  of  the  larger  issue.  Very  frequently,  however, 
issues  are  made  specifically  designed  for  tlie  purpose  of  re- 
funding, which  gives  the  name  to  a  very  large  amount  of 
bonds  at  ])resent  in  the  market.  Any  kind  of  corp(jration 
may  issue  these,  which  are  essentially  a  continuation  of  a 
former  debt  beyond  its  maturity.  When  the  matiu'ing 
bond  is  not  retired  in  exchange  for  a  proportionate  amount 
of  the  new^  issue,  it  is  cancelled  and  payment  made  through 
sale  of  part  of  the  issue.  Refunding  issues  are  generally 
as  well  secured  as  the  bonds  they  retire.  A  few  corpora- 
tions, mostly  railroads,  have  found  it  expedient  to  consoli- 
date much  of  their  funded  del)t,  covei'ing  it  by  only  one 
issue  of  bonds  known  as  unified.  In  this  way  a  simi)lilica- 
tion  is  accomplished  ])y  uniting  luider  a  single  issue  a  mass 
of  miscellaneous  obligations.  The  advantages  to  be  de- 
rived from  this  procedure  are  not  a  few.  One  is  increased 
facility  of  management  of  the  del)t — another,  the  generally 
better  market  which  the  new  security  enj(\vs  over  those  it 
displaces.  The  whole  operation  is  indeed  in  most  respects 
analogous  to  refunding.  What  differences  exist  are  unim- 
portant. 

Lien. 

The  rehabilitation  of  many  corporations,  through  rear- 
rangement of  their  liuances,  before  or  after  a  critical  jioint 
was  reached,  evolved  a  number  of  ty])es  peculiar  to  such 
conditions.  Kehabilitation  after  this  manner  was  in  every 
instance  a  form  of  reorganization  out  of  which  came  such 
bonds  as  reorganization  lien.  The  characteristics  of  these 
issues  grew  out  of  the  attending  circumstances  and  they 


CLASSIFICATION  OF  BONDS  319 

were  generally  vested  with  only  a  junior  lien  on  the  prop- 
erty reorganized.  But  as  reorganization  of  a  company 
means  settlement  of  the  claims  of  the  various  interested 
parties  on  a  satisfactory  basis,  there  has  been  issued  oc- 
casionally a  form  of  bond  in  many  respects  similar  to  the 
last  mentioned  and  called  adjustment.  Always  an  out- 
gnnvtli  of  such  conditions,  its  features  have  been  de- 
termined accordingly.  In  this  way  additional  capital  for 
improvements  has  been  realized,  while  a  lien,  only  junior 
in  its  preferment,  has  been  given.  An  excellent  example 
of  this  type  of  security  is  the  Atchison,  Topeka  &  Santa 
Pe  4  per  cent  adjustment  issue,  growing  out  of  reor- 
ganization of  that  road  in  1896.  The  success  of  a  reor- 
ganization plan  is  generally  dependent  upon  the  ability  to 
secure  additional  funds.  So  to  insure  this,  it  has  some- 
times been  necessary  to  give  a  preferential  claim  to  those 
providing  the  funds.  A  prior  lien  bond  has  therefore 
been  issued.  Practically  all  such  issues  are  railroad  ol)liga- 
tions  secured  by  mortgage  but  are  not  always,  as  might 
naturally  be  supposed,  the  first  ol)ligation  of  the  issuing 
company.  The  name  is  but  a  relative  temi  and  may  mean 
no  more  than  that  the  bond  is  prior  to  some  other  specified 
issue.  As  mortgages  covering  prior  lien  bonds  are  usually 
general  in  character,  embracing  much  property,  they  are, 
like  all  such,  subject  to  other  liens.  The  distinction  there- 
fore, between  prior  lieu  bonds  and  those  having  a  prior 
lieu  is  to  be  marked.  Tlu^  I'j-ic  Railroad,  among  others,  has 
a  representative  prior  lien  issue. 

Income. 

Insolvency  and  reorganization  produce  still  another 
bond.  At  such  times  concessions  are  required  of  some  se- 
curity holders,  and  for  the  compensation  of  those  making 
the  sacrifice  there  is  issued  the  income  bond.  With  few 
exceptions,  this  has  been  its  orgin;  it  is,  however,  fast  dis- 
appearing from  the  lists.     Briefly  stated,  it  is  an  obligation 


320  FREDERICK  LOWNHAUPT 

the  interest  on  which  is  payable  out  of  net  earnings  after 
all  fixed  charges  have  been  met.  Interest,  therefore,  is 
contingent,  being  entirely  dependent  upon  the  earnings  of 
the  company  and  still  further  uncertain,  in  that  it  is  payable 
or  not  in  the  discretion  of  the  mangement.  Sometimes  it 
is  cumulative,  standing  as  a  charge  ahead  of  all  dividends 
on  the  stock.  Generally  such  bonds  are  mortgage  secured 
as  to  i^rincipal  and  are  always  a  jimior  lien. 

Assented  Income. 

The  status  of  an  income  bond  may  be  changed  by  agree- 
ment. Absorption  of  a  small  line  of  railway  by  a  great 
system  usually  brings  about  a  modification  of  the  securities 
of  the  former;  the  larger  company  may  wish  to  withdraw 
certain  issues,  for  which  privilege  it  makes  attractive  offers 
to  the  holders.  Tn  the  case  of  the  assented  income  bond 
a  fixed  and  regular  interest  return  is  assured  where  form- 
erly it  was  contingent.  For  this  the  company  is  given  some 
privilege,  say  perhaps  to  retire  them  before  maturity  at 
a  stipulated  price.  Concurrence  of  the  bondholders  in 
such  an  arrangement  gives  rise  to  the  name. 

Collateral  Trust. 

A  t}^')Q  of  bond  which  came  into  prominence  and  favor 
within  the  past  few  years  but  whose  po]^iilarity  is  now 
waning,  is  that  which  depends  for  its  safety  entirely  or 
almost  entirely  upon  the  pledge  of  other  securities  usually 
taken  from  the  treasury  of  the  issuing  company  or  system 
and  placed  in  trust,  under  the  terms  of  the  collateral  mort- 
gage, to  secure  payment  of  principal  and  interest.  These 
securities  may  consist  wholly  or  in  part  of  stocks  or 
bonds,  and  are  generally  the  obligations  of  auxiliary  com- 
panies. Up  to  about  the  year  1900,  bonds  were  exten- 
tensivelv  used  as  securitv  and  nearlv  all  of  first  and 
second  mortgage;  subsequently,  deposit  of  stock  only 
became   the   general   practice.     Under   variously   named 


CLASSIFICATION  OF  BONDS  321 

issues,  practically  all  of  the  railways  and  many  •other  cor- 
porations report  large  collateral  trust  mortgages.  Many 
such  issues  have  found  their  source  in  the  holding  com- 
pany, a  corporation  having  no  independent  credit  and 
usually  operating  no  properties  and  whose  assets  con- 
sist largeh'  of  stocks  and  bonds  of  other  companies.  In 
fact,  this,  with  but  one  other  kind,  the  debenture,  is  the 
only  bond  obligation  such  a  company  can  issue.  A  large 
number  of  companies  are  both  holding  and  operating,  when 
of  course,  they  may  issue  any  kind.  Typical  examples  of 
a  purely  holding  company  were  to  be  found  in  the  Northern 
Securities  Company  and  the  United  States  Steel  Corpora- 
tion when  it  was  first  organized.  At  present,  the  United 
States  Steel  Corporation,  Pennsylvania  Railroad,  and 
Union  Pacific  Railroad  are  excellent  examples  of  companies 
both  holding  and  operating. 

Joint. 

What  may  be  a  collateral  trust  obligation  (though  it 
may  be  any  other)  is  the  joint  bond;  as  such  it  was  exempli- 
fied in  the  Great  Northern-Northern  Pacific  Joint  4's  is- 
sued in  1901  and  secured  by  deposit  of  Chicago,  Burlington 
&  Quincy  Railroad  stock.  Taking  this  as  representative, 
it  is  a  security  issued  by  two  or  more  companies  (usually 
two),  each  company  being  liable  for  its  proportion  of  the 
bonds,  both  principal  and  interest.  Provision  is  usually 
made  that  should  either  company  default  in  its  obligations, 
the  company  not  defaulting  shall  become  owner  of  the  en- 
tire property  and  shall  liecome  liable  in  severalty  upon  all 
covenants  contained  in  the  bonds. 

Participating. 

Past  success  in  the  flotation  of  some  large  blocks  of  col- 
lateral trust  bonds  may  be  attributed  to  one  or  more  special 
features  embodied.  An  expedient  that  has  been  used  is 
permission  to  share  beyond  the  regular  fixed  rate  of  inter- 

B.VII— 21 


322  FREDERICK  LOWNHAUPT 

est  in  profits  that  niij^ht  accnio  under  certain  eonditions. 
The  arrani^^enient  as  generally  carried  out  allows  ])articipa- 
tion  to  a  si)ecitied  i)roi>ortion  in  any  increased  dividend 
that  may  be  declared  on  the  nnderlyinj^:  stock  collateral. 
A  notable  example  was  the  Oreiron  Short  Line  R.  R.  4's  is- 
sued in  1902.  Another  bond  that  enjoys  the  possibility 
of  larger  return  thr(ni<,di  increased  income  or  profits  on 
underlying:  collateral  is  that  known  as  profit  sharing.  The 
form  is  very  seldom  used,  the  best-kno^^^l  issue  being  that 
of  the  London  LTnderground  Electric  Railways.  Its  se- 
curity lies  in  deposit  of  stock  as  a  basis,  which  stock  is  de- 
posited at  a  certain  price,  the  provisions  of  the  mortgage 
permitting  its  sale  when  the  market  assures  a  jirofit,  the 
sale  price  of  course  being  above  that  at  which  the  stock  was 
deposited  as  collateral.  In  the  event  of  disposition  of  tiie 
stock  prior  to  the  due  date  of  the  bonds  the  holders  share 
in  the  profits  realized  from  such  sale. 

Convertible. 

The  convertible  jjond  is  the  eml)odiment  of  anotlier  idea 
involving  profit-sharing  provisions.  A^ery  frequently  a 
corporation  cannot  issue  stock  to  advantage  as  a  means 
of  obtaining  funds  for  its  needs  and  is  therefore  restricted 
to  some  method  entailing  pledge  of  its  property  or  credit. 
Prevailing  conditions  may  hold  out  large  promises  of  suc- 
cess for  an  issue  of  convertible  bonds  as  the  only  ty]ie  ex- 
actly filling  the  requirements  of  the  situation.  This 
privilege  of  conversion,  the  feature  of  this  type,  is  incor- 
]>orate(l  in  the  mortgage  and  allows  the  holder  to  convert 
his  securitv  into  some  other  form  of  obligation,  usuallv 
stock,  within  a  spi'citied  time  and  at  a  sjiecified  rate.  What 
may  become  the  source  of  profit  is  the  j)ossible  high  market 
price  on  the  stock  at  the  time  the  privilege  is  exercised. 
P)y  then  exchanging  the  bonds  for  stock  and  turning  that 
into  the  market  a  substantial  profit  could  be  realized.  A 
high  quotation  for  the  stock  substantially  indicates  sound 


CLASSIFICATION  OF  BONDS  323 

business  conditions   and   increased  profits   in   which   the 
convcrtibk;  bondhokkn*  is  thus  privik\i^ed  to  share. 

Sinking  Fund  Redeemable. 

Most  bonds  run  for  a  definite  period  of  time;  that  is,  they 
are  intended  to  live  out  their  allotted  number  of  years. 
Among-  those  otherwise  designed  are  some  subject  to  re- 
purchase by  the  issuing  corporation  within  a  specified  time 
or  at  a  certain  date.  To  accomplish  this  a  certain  amount 
of  money  is  set  aside — more  often  annually — to  retire  the 
bonds  at  that  time.  It  is  customary  with  many  nuniicipal 
and  public  seryice  corporations  and  also  with  nearly  all 
companies  whose  assets  are  gradually  depleted  by  the 
operations  of  business  to  follow  this  plan,  thus  establish- 
ing what  is  known  as  a  sinking  fund.  All  bonds  that  may 
be  retired  in  that  way  are  so  called.  Sinking  fund  bonds 
of  all  but  public  corporations  are  generally  protected  by 
a  mortgage,  which  contains,  if  the  bond  itself  does  not, 
the  proyisions  relatiye  to  the  operation.  A\Tien  bonds  are 
subject  to  a  sinking  fund,  or  liable  to  be  retired  at  the 
option  of  the  maker,  they  are  said  to  be  redeemable. 

Irredeemable,  Perpetual,  Annuity. 

In  contradistinction  to  those  so  affected  are  some  whose 
life  is  practically  intenninable,  sometimes  referred  to  as 
perpetual  bonds.  Very  seldom  issued,  they  are  an  obliga- 
tion whose  retirement  is  not  proyided  for  by  any  specified 
date  of  maturity.  Ordinarily  this  would  necessitate  pur- 
chase in  the  open  market  or  refunding,  should  it  be  desir- 
able to  retire  them.  This  is  true,  of  course,  so  long  as  all 
proper  conditions  exist.  Should  default  in  interest  occur, 
the  principal,  which  is  mortgage  secured  where  not  a  public 
corporation  obligation,  becomes  instantly  due.  The  same 
principal  is  worked  out  in  all  essential  particulars  in  the 
annuity  bond  whose  chief  characteristic  is  obyiously  per- 
petuity.   Of  this  last  type  very  few  companies  have  any 


324  FREDERICK  LOWNHAUFT 

OTitstaiiding,  those  most  prominent  being  the  Long  Island 
Railroad  and  Lehigh  Valley  Railroad  issues.  As  for  ir- 
redeemable bonds  as  a  class  they  are  not  nmnerous.  Sev- 
eral of  the  states— Kentucky  for  one— have  small  amounts 
and  about  an  equal  number  of  railroad  corporations  have 
a  few.  Further  examples  may  be  found  in  British  Consols 
and  the  Rentes  of  Fi-ance  and  other  foreign  countries, 
though  they  differ  fundamentally  from  American  issues. 
In  those  countries  no  paper  evidence  of  debt  is  issued 
for  a  mere  record  of  the  obligation  is  always  considered 
sufficient. 

Exempt,  Non-exempt. 

Lender  property  classification,  bonds  become  subject  to 
the  laws  imposing  taxation.  But  not  all.  Those  released 
from  such  liability  are  thereby  given  a  prominent  and  de- 
sirable feature  and  enjoying  this  privilege  are  called  ex- 
empt. But  the  term  ''exempt"  is  used  in  another  sense — 
to  indicate  immunity  from  call  for  sinking  fund  purposes. 
This  fact  is  peculiar  to  a  few  issues  at  present  in  the 
market;  a  portion  only  is  subject  to  retirement  by  such  a 
fund  and  that  part  which  may  be  so  retired  is  specially 
designated  as  non-exempt.  Again,  there  are  bonds  whose 
life  might  be  uncertain  and  their  value  unstable  were  they 
to  remain  under  the  same  conditions  as  issued.  Indeed 
it  may  be  imperative  through  reorganization  or  other- 
wise that  the  force  of  the  obligation  be  lessened  and  its 
terms  modified;  or  again,  new  or  different  privileges  may 
be  granted  to  the  holders  of  an  issue,  or  some  mutual  agree- 
ment may  be  made  involving  a  change  of  conditions,  such 
as  the  reduction  of  interest  or  the  insertion  of  the  call 
privilege.  The  record  of  such  changed  conditions  is  usually 
stamped  upon  the  bond  and  thereby  becomes  a  part  of  the 
instrument.  Of  course,  anv  bond  mav  be  so  treated  and 
would  then  have  this  additional  qualifier,  stamped.  This 
bond  is  seldom  used. 


CLASSIFICATION  OF  BONDS  325 

Guaranteed,  Endorsed. 

One  of  the  conditions  frequently  included  in  a  bond  con- 
tract is  that  of  guarantee,  where  payment  of  either  princi- 
pal or  interest  or  both  is  assured  by  the  promise  of  another 
corporation.  It  accepts  the  liability,  contingently,  as  the 
case  may  be,  and  consequently  enhances  in  a  greater 
or  less  degree  the  value  of  the  obligation  as  an  investment. 
These  bonds  are  frequently  spoken  of  as  endorsed,  inas- 
much as  the  guarantee  is  quite  generally  given  by  endorsing 
the  instrument  to  that  effect. 

Subsidy,  Land  Grant. 

For  the  purpose  of  classification,  the  subsidy  bond  may 
justly  be  considered  as  a  guaranteed  obligation.  Here, 
by  pledging  itself  to  pay  the  interest  on  bonds  issued  for 
construction  purposes,  a  government  assists  in  establish- 
ment and  support  of  an  enterprise  deemed  advantageous 
to  the  public.  Or  else,  what  amounts  to  a  subsidy,  it  gives 
special  rights,  powers,  and  privileges,  and  perhaps  the 
enjoyment  of  absolute  or  conditional  immunity  from  taxa- 
tion. Formerly  municipalities  and  states  subsidized 
largely,  in  one  form  or  another,  l)ut  it  is  no  longer 
practicable,  and  indeed  it  is  generally  impossible  for  them 
to  do  so.  Notwithstanding  this,  in  one  or  two  states 
municipal  aid  may  yet  be  extended  by  legislative  authority 
in  exempting  from  taxation  or  by  endorsing  or  issuing 
bonds  in  the  case  of  gas  works,  water  woi-ks,  railroads,  etc. 
Thirty  years  ago  these  practices  were  widely  prevalent 
in  the  United  States,  principally  in  support  and  encourage- 
ment of  railroad  building.  Foreign  governments  still  em- 
ploy this  means  of  promoting  undertakings.  Subsidizing, 
however,  does  not  always  take  the  form  of  payment  of 
interest  or  principal  or  the  bestowal  of  prerogatives.  Build- 
ing of  the  great  transcontinental  lines  of  this  country  was 
made  possible,  at  the  time  they  were  laid  do^^^l,  by  substan- 


326  FREDERICK  LOWNHAUPT 

tial  gifts  of  public  land  from  the  Government.  Bonds  were 
issued  to  raise  funds  for  construction,  and  the  lands  were 
pledi^^'d  under  a  mortgage  for  their  redemption.  These 
lands  were  gradually  sold  and  the  proceeds  applied  to  pay 
interest  on  these  bonds  and  to  form  a  sinking  fund  to  retire 
them  eventually.  ^lost  of  these  bonds  have  been  with- 
drawn and  as  the  public  d<tmain  is  not  now  large  and  the 
roads  originally  benefited  are  practically  in  a  position  to 
take  care  of  their  financial  needs  without  governmental 
assistance,  this  type  of  obligation  will  soon  be  extinct. 
Thus  it  is  that  land  grant  bonds  are  distinctively  railroad 
issues.  Beyond  these  gifts  of  land  the  Federal  Government 
rendered  no  material  aid  to  roads  except  in  very  few  in- 
stances. 

Terminal. 

Scarcely  less  distinctive  as  a  railroad  bond  is  that  form 
of  obligation  secured  by  mortgage  on  terminal  })roperty 
and  usually  given  by  a  terminal  company.  The  stock  of 
such  a  company  is  generally  held  by  a  road  or  association 
of  roads  having  common  terminal  facilities  and  known  as 
a  terminal  company.  Provision  for  principal  and  inter- 
est is  made  by  pa^^nents  of  rental  by  each  company.  This 
is  the  general  practice  although  railway  companies  as  such 
have  issued  terminal  bonds,  their  interest  becoming  a 
proper  charge  on  the  revenues  of  the  company. 

Divisional. 

The  integral  parts  of  nearly  all  great  railroad  systems 
bear  sej^arate  mortgages  which  were  placed  upon  them 
l)efore  their  consolidation.  These  ])arts  are  designated  as 
divisions,  and  the  bonds  issued  for  their  account  are  se- 
cured by  a  lien  on  the  respecti\('  ]»ai-t  only.  The  obli- 
gati(tn,  however,  is  that  of  the  ])arent  com})any,  the  term 
merely  indicating  that  the  security  given  is  some  specific 
division  of  the  property. 


CLASSIFICATION  OF  BONDS  327 

1-2-3-4-5  Mortgage,  Debenture. 

Extremes  meet  when  wo  consider  the  purely  first  mort- 
gage bond  and  the  debenture,  the  characteristic  of  the  for- 
mer being  its  absohite  priority  of  lien.  A  bond  that  may 
rightfully  be  called  first  mortgage  is,  in  fact,  not  subject 
to  any  other  liens,  its  security  ])eiug  a  mort,c:age  to  which 
all  others  are  subsquent.  Strictly  speaking,  any  such 
bonds  should  be  protected  by  a  mortgage  senior  in  position 
on  all  the  property  denominated,  yet  in  practice  the  un- 
derlying mortgage  has  sometimes  been  made  first  on  only 
a  portion  of  the  property.  Tliere  have  been  also  second, 
third,  fourth,  and  fifth  mortgage  bonds,  all,  of  course, 
respectively  junior  in  their  lien,  but  they  have  passed  out 
of  favor  to  an  extent  that  any  beyond  second  are  practically 
unkno^^^l  now.  ComjDlete  absence  of  representative  physi- 
cal security  in  so  far  as  a  mortgage  is  concerned  is  the 
dominant  characteristic  of  the  debenture  bond.  In  reality 
it  differs  little  from  a  promissory  note  being  generally  a 
simple  promise  to  pay.  In  effect  it  is  a  very  formal  note. 
It  is  generally  a  last  claim  on  the  properties  of  the  issu- 
ing company  and  is  inferior  to  all  other  of  its  bonds. 
Obviously  none  but  corporations  of  a  high  character  and 
whose  status  is  well  defined  can  successfully  issue  this 
type.  The  tenn  ' '  debenture ' '  means  de])t.  Under  this  brc^ad 
interpretation  other  obligations  are  sometimes  so  called. 
Principal  among  these  are  some  bonds  issued  by 
municipalities  in  Canada.  The  debenture  is  an  idea  char- 
acteristically English  and  one  that  may  be  said  to  have  been 
borrowed  by  some  of  the  larger  and  stronger  corporations 
of  this  country.  A  few  railroad  C(U'porations  have  out- 
standing what  are  known  as  ''plain"  bonds  which  are 
nothing  more  or  less  than  debentures  having  likewise  no 
mortgage  security. 

From  the  foregoing,  a  relationship,  more  or  less  near, 
between  the  character  of  a  bond  and  its  name,  is  evi- 


328  FREDERICK  LCWNHAUPT 

dent.  "With  some  it  is  very  close,  the  name  indirating 
clearly  the  nature  of  the  obligation;  with  others,  but  vague- 
ly explanatory,  conveying  only  a  meager  idea  of  its  nature. 
At  best  a  name  is  no  more  than  a  descriptive  terai  or  com- 
bination of  terms  qualifying  each  other,  any  one  of  which 
may  represent  the  chief  feature  of  a  howl.  With  accumu- 
lating issues  on  a  property  it  is  often  difficult  to  name  suit- 
ably a  new  one  so  as  to  make  it  fully  expressive;  hence  the 
necessity  of  long,  often  confusing  and  sometimes  ap- 
parently conflicting,  combinations.  The  name,  however, 
is  not  always  the  result  of  circumstances  of  this  nature. 
It  would  not  be  without  precedent  should  sinister  motives 
actuate  a  company  in  describing  a  proposed  bond  issue. 
Certain  terms  of  course  are  technicallv  admissible  in  names; 
}'et  this  has  sometimes  been  presumed  upon  to  an  extent 
actually  misleading.  AVhile  some  names  are  indeed 
adequately  descriptive,  mere  titles,  often  signifj'ing  only 
part,  mean  little  from  the  viewpoint  of  investment.  Every 
issue  must  be  studied  carefully  and  examined  on  its  own 
merits. 

In  the  title  of  almost  every  bond  one  term  at  least  is  an 
index  of  its  nature.  For  example,  names  like  assessment, 
tax  relief,  and  the  like,  instantly  indicate  municipal  issues; 
we  know  at  a  glance  the  class  of  the  issuing  corporation. 
The  relative  position  of  a  bond  issue  is  a  matter  of  vital 
importance.  To  some  extent  this  is  shown  in  names. 
Again,  the  specific  purpose  of  issue  is  many  times  embodied 
in  the  name;  special  features  and  unusual  j^rivileges  are 
betokened  and  nearly  always  there  is  evidence  of  the 
presence  and  nature  or  the  absence  of  security. 

The  su])ioined  classification,  number  two,  proceed inc: 
along  this  line  shows  in  a  general  way  the  bonds  whose 
names  indicate  their  function,  security  or  its  absence,  se- 
curity and  function,  maturity  conditions  and  conditions 
existing  during  life.  The  other  tabular  form  follows  the 
text  early  in  this  article,  beginning  with  the  great  classes 


CLASSIFICATION  OF  BONDS  329 

of  corporations,  considering  the  various  kinds  of  cor- 
porations in  each  class  and  the  different  types  of  bonds 
issued  by  each.  Both  these  classifications  admit  of  many 
variations,  but  in  the  main  they  present  the  numer- 
ous issues  corresponding  closely  to  common  practice.  Hav- 
ing considered  the  comiDonent  terms  of  names,  it  is  inter- 
esting to  note  the  variety  of  combinations  wrought  out: 

First  Lien  and  Collateral  Trust. 

First  ^lortgage  and  Collateral  Trust. 

First  Consolidated  Mortgage. 

First  Lien  and  Consolidated. 

First  Refunding  Mortgage. 

First  and  Refunding. 

First  Extension  Mortgage. 

First  and  Collateral. 

First  Lien  and  Convertible. 

First  Lien  and  Refunding. 

First  General  Mortgage. 

First  Mortgage  Extension. 

General  First  ^lortgage. 

General  Refunding  Mortgage. 

General  Lien  Railway  and  Land  Grant. 

General  Second  Mortgage. 

General  Third  ^fortgage. 

General  Lien  Divisional  First  ^lortgage. 

General  and  Refunding  Mortgage. 

General  Consolidated  and  First  ^lortgage. 

Railroad  and  Land  Grant  General  First  ^lortgage. 

Prior  Lien  Railway  and  Land  Grant. 

Refunding  and  Extension. 

Collateral  Trust  and  First  Lien. 

Consolidated  First  and  Collateral  Trust. 

Refunding  and  Improvement. 

Consolidated  First  and  Extension. 


330 


FREDERICK  LOWNHAUPT 


No.  1. 


PUBLIC 


Municipal 


4  State 


^Federal  Gov't. 


Railroad 


QUASI-PUBLIC       <   Pviblic  Service 


^Traction 


PRIVATE 


''industrial 
and 
Others 


Refunding 
Sinking  Fund 
Improvement,  etc. 


Purchase  Money 
Refunding 
Improvement 
Fxtcnsion 
Construction 
Adjustment 
Unified 

Reorganization  Lien 
Consolidated  Mortgage 
1st.  -nd,  rird,  Mortgage 
General  Mortgage 
Divisional 
Collateral  Trust 
Debenture 
Sinking  Fund 
Income 
Terminal 
Land  Grant 
Real   Estate 
Prior  Lien 
Joint 
Car  Trust 
Irredeemable 
Assented  Income 
Annuity 
Convertible 
Participating 
.Profit  Sharing 

Debenture 
Construction 
Consolidated  Mortgage 
1st  Mortgage 
General  Mortgage 
Collateral  Trust 
Income 
Equipment 
Sinking  Fund 
Convertible 
Founders 
^Real  Estate 


CLASSIFICATION  OF  BONDS 


331 


No.  2. 


FUNCTION 


SECURITY 

(,as  to  principal  or  interest 
or  both) 


SECURITY  AND  FUNCTION 


MATURITY  CONDITIONS 


CONDITIONS  DURING  LIFE 


Purchase  Money 
Refunding 
Improvement 
Extension 
Construction 
Adjustment 
Unified 

Reorganization  Lien 
Consolidated  Mortgage 
^Subsidy 

1st  Mortgage 
2nd  Mortgage 
3rd  Mortgage 
General  Mortgage 
Divisional 

Guaranteed  or  Endorsed 
Collateral  Trust 
Debenture 
Income 
Terminal 
Land  Grant 
Real  Estate 
Prior  Lien 
^Joint 


{ 


Car  Trust 
Equipment 


Redeemable 
Irredeemable 
Profit  Sharing 
Non-Exempt 
Assented  Income 
^Annuity 

''Convertible 

Stamped 

Exempt 
^.Participating 


GROWING  POPULARITY  OF  PUBLIC  SERVICE  COR- 
PORATION  BONDS  AS  INVESTMENT. 

BY  THOMAS  W.  SIMMONS. 
[Of  Bertron,  Griscom  &  Jenks.] 

Students  ui*  investment  securities  have  for  some  years 
been  interested  observers  of  the  growing  popularity  of 
public  service  corporation  bonds  as  investments.  The  in- 
creasing favor  of  such  securities  has  not  been  confined  to 
anv  one  class  of  buvers.  The  result  has  not  been  attained 
suddenly.  Some  prejudice  had  to  be  overcome,  and  the  ad- 
vance has  been  contested  step  by  step  by  opposing  interests. 
Only  because  they  merited  confidence  has  the  faith  of  invest- 
ors been  secured.  Proof  of  the  present  popularity  of  public 
service  corporation  bonds  is  found  in  statistics  recently 
compiled  by  the  Comptroller  of  the  Currency  of  the  United 
States  Treasury  Department.  The  report  covers  invest- 
ments held  by  all  reporting  l^anking  institutions  of  the  Unit- 
ed States,  embracing  national,  state,  savings,  private  banks 
and  trust  companies.  A  comparison  of  the  figures  of  June 
30,  1910,  with  those  of  the  same  date  in  1909  shows  that 
during  said  year  these  institutions  reduced  their  holdings 
of  municipai  bonds  by  $46,7:"59,7SS,  and  their  holdings  of 
railroad  bonds  by  $10G,0G0,r)20,  while  increasing  their  in- 
vestments in  public  service  corporation  bonds  by  $23,017,- 
^67.  Thus  it  is  sIkavii  that  the  latter  class  has  not  only  won 
its  way  to  popular  favor,  but  has  received  very  strong  recog- 
nition at  the  hands  of  discriminatinc:  officials  of  banking  in- 
stitutions, who  are  qualified  to  pass  intelligent  judgment  up- 
on the  merits  of  investments. 

Tn  the  light  of  these  facts,  tlie  in-esent  popularity  of 
public  service  corporation  bonds  as  investments  must  be 
acknowledged.    That  this  popularity  will  continue,  no  well- 

332 


PUBLIC  SERVICE  CORPORATION  BONDS      333 

informed  student  of  investment  securities  doubts.  Care- 
fully selected  public  service  corporation  bonds  contain  all 
the  elements  of  safe  and  desirable  investments.  That  all 
such  issues  cannot  be  safely  bought  goes  without  saying,  but 
the  percentage  of  good  bonds  has  largely  increased  during 
recent  years,  until  now,  with  the  exercise  of  ordinary  pru- 
dence, they  may  be  safely  bought  by  all  classes  of  institu- 
tional and  private  investors,  with  the  exception,  only,  of 
savings  banks  and  trustees,  who  are  limited  to  that  particu- 
lar class  of  securities  prescribed  by  the  statute  laws  of  their 
respective  States.  Even  these  restrictions  are  being  re- 
moved, and  many  States  now  permit  savings  banks  and 
trustees  to  invest  in  the  best  public  utility  bonds.  It  is  con- 
fidently predicted  that  the  number  will  be  materially  in- 
creased as  these  securities  continue  to  pass  successfully  the 
test  of  time  and  as  their  merits  shall  become  better  under- 
stood. 

As  it  is  well  known  that  public  utility  bonds  have  not 
always  been  favorably  regarded  by  careful  investors,  it  is 
interesting  to  know  what  has  brought  about  the  change. 
This  may  be  clearly  understood  in  the  light  of  the  history  of 
such  securities. 

Like  all  innovations  and  improvements,  public  service 
corporations  have  had  their  periods  of  gi'owth  and  experi- 
ment. Only  a  few  years  since,  the  horse  car  and  the  coal-oil 
lamp  were  in  general  use.  From  these  to  the  rapid  and  con- 
venient service  of  the  present  day  has  been  a  long  step,  but 
it  has  covered  only  a  few  years.  That  which  was  at  first  an 
experiment  is  now  a  necessity  of  modern  life.  Experiments 
are  usually  attended  by  mistakes ;  and  the  origin  and  gro^\'th 
of  electric  railway,  gas  and  electric  light  companies  consti- 
tute no  exception  to  the  rule. 

Until  the  advantages  of  the  service  furnished  by  these 
corporations  were  fully  understood,  and  while  both  construc- 
tion and  operation  were  in  their  experimental  stage,  it  was 
natural  that  the  former  should  not  have  been  of  a  permanent 


334  THOMAS  W.  SIMMONS 

character  and  that  tlic  latter  sliould  have  been  unskillful. 
The  p'eat  ini])etns  that  the  service  of  these  corporations 
has  given  to  general  business  and  to  suburban  development 
was  then  undreamed  of.  The  machinery  used  by  such  com- 
panies was  imjx'rfeet,  and  expert  management  was  un- 
known. Pro})erties  wcic  almost  without  exception  con- 
structed and  operated  under  the  su])ervision  of  local  men,  of 
bankci's,  lawyers,  merchants  and  mamifaoturers.  These 
men  possessed  neither  technical  nor  practical  knowledge  of 
the  business,  and  their  mistakes  were  manv  and  costlv.  Sta- 
tistics  were  lacking  which  would  have  enabled  capable  en- 
gineers to  have  foretold  the  success  or  failure  of  contemi)la- 
ted  electric  railway,  gas  or  electric  lighting  systems.  Be- 
cause confidence  was  lacking,  financing  was  difficult  and 
expensive,  and  too  frequently  the  proceeds  of  securities 
sold  were  either  through  ignorance  or  actual  dishonesty  mis- 
applied. Vast  amounts  which  should  liave  been  judiciously 
expended  for  construction  and  equii)ment  were  annually 
put  into  the  pockets  of  promoters  or  paid  to  politicians  for 
privileges  or  protection.  Only  recently  has  it  become  fully 
understood  that  in  the  management  of  these  large  cor})or- 
ations  honesty  is  the  best  policy,  and  that  a  public,  satisfied 
by  good  service  at  reasonable  cost,  constitutes  the  best  safe- 
guard against  unfair  competition  ov  ]irejudiced  attack. 
Even  the  laws  governing  these  companies  were  for  many 
years  either  inadequate  (tr  unfair,  and  there  was  lacking 
those  legal  precedents  which  are  so  uecessiiry  to  both  the 
investor's  confidence  and  protection.  As  the  discovery  of 
gold  in  a  new  country  always  attracts  a  large  class  of  the 
lawless  and  unscrupulous,  so  this  new  field  of  finance  was 
quickly  invaded  by  many  inex|)erienced  and  ))v  some  dis- 
honest manipulators,  whose  only  desire  was  to  mamifacture 
securities,  sell  them  to  the  public,  and  then  quickly  retire 
with  the  sj)oils.  Had  these  conditions  continued,  public 
service  corporation  Ixtnds  would  never  have  attained  popu- 
larity among  investors. 


PUBLIC  SERVICE  CORPORATION  BONDS     335 

It  is  only  noccssary  to  compare  public  utility  companies 
of  today  with  those  of  even  the  recent  past  in  order  to  fully 
understand  the  change  that  has  taken  place.  If  a  simile  may 
be  permitted  for  the  purpose  of  illustration,  it  may  be  said 
that  formerly  these  corporations  represented  the  inexperi- 
ence and  inunaturity  of  youth,  while  those  of  today  are  the 
child  grown  in  experience,  knowledge  and  strength  to  the 
full  stature  of  a  man. 

Today  every  properly  equipped  bond  house  maintains 
numerous  departments,  the  sole  business  of  which  is  to  in- 
vestigate conditions,  examine  properties,  and  supervise  the 
issuance  of  securities.  Experts  are  employed  in  all  branch- 
es of  this  work,  and  every  phase  of  the  situation  is  covered. 
The  locality  in  which  the  public  service  corporation  under 
consideration  is  operating,  or  in  which  it  is  contemplated  it 
will  operate,  is  fully  investigated.  The  size,  density  and 
character  of  population  is  taken  into  account;  the  perma- 
nency and  probable  growth  of  the  community ;  the  character 
of  its  industries  and  whether  or  not  these  are  diversified,  or 
whether  they  are  principally  of  one  kind  and  therefore  sub- 
ject to  periodical  depressions  of  a  serious  character,  are  all 
regarded  as  matters  of  great  importance.  Then,  too,  polit- 
ical conditions  are  looked  into  for  the  purpose  of  determin- 
ing the  likelihood  of  fair  or  prejudicial  legislation.  These 
questions  vitally  affect  franchise  rights,  upon  the  mainte- 
nance of  which  the  success  of  eveiy  public  service  corpora- 
tion depends.  The  attitude  of  some  city  governments  and 
even  of  some  state  governments  is  still  so  antagonistic  to 
utility  companies  that  careful  bankers  are  unwilling  to  risk 
their  money  or  that  of  their  clients  in  securities  that  may  be 
jeopardized  by  the  attacks  of  politicians  who  are  willing 
even  to  destroy  values  in  order  to  feed  a  popular  prejudice 
which,  in  the  main,  they  originally  created. 

AVithout  discussing  the  question  of  the  wisdom  of  munic- 
ipal ownership  in  some  cases,  it  is  apparent  that  many  agi- 
tations which  have,  at  least  temporarily,  unsettled  values, 


336  THOMAS  W.  SIMMONS 

have  been  based  upon  nothing  more  reasonable  than  the  de- 
sire of  one  political  party  or  faction  to  obtain  success  at  the 
polls.  In  almost  all  cases  in  this  country,  municipal  owner- 
ship, when  tried,  has  proved  anything  but  profitable,  and  in 
almost  every  case,  too,  in  which  this  has  been  true,  the  result 
could  have  been  foreseen  from  the  bej^inninc;  bv  anv  reason- 
ably  well-informed  person,  if  the  cpiestion  had  been  consid- 
ered solely  from  a  business  standpoint  and  with  a  mind  free 
from  bias  and  uninfluenced  by  popular  clamor. 

Not  only  does  the  far-sighted  investment  banker  look 
carefully  into  political  conditions  before  investing  his  mon- 
ey ill  communities  in  which  there  is  a  popular  prejudice 
against  public  service  corporations,  but  he  even  hesitates  to 
invest  in  States  in  which  the  courts  of  last  resort  have  not 
by  their  decisions  established  precedents  which  mark  out  a 
safe  course  for  him  to  follow. 

The  question  of  locality  having  been  favorably  passed 
upon,  the  investigation  is  next  directed  to  the  i>roperty  it- 
self. Such  an  examination  requires  the  skill  of  experts  in 
both  construction  and  operation.  The  Ijcst  talent  obtain- 
able is  employed  for  this  work.  Such  men  do  not  simply  re- 
port upon  present  values,  but  they  foretell  with  surprising 
accuracy'  what  the  future  success  of  a  propei-ty  ^vill  be.  They 
can  estimate  future  earnings  and  future  expenditures  ^^^th 
remarkable  certainty,  and  thus  furnish  statistics  which  can 
be  safely  taken  as  a  basis  for  present  and  future  financing. 
Thus  a  banking  house,  before  purchasing  investment  bonds 
offered  for  sale,  not  only  knows  iho  valno  of  the  property 
which  at  the  time  constitutes  the  security  behind  the  bonds, 
but  it  also  knows  what  the  future  financial  requirements  of 
the  coni])any  will  be,  and  whether  or  not  future  earnings 
will  justify  the  same. 

Formerly  while  ]Mi])lic  utility  companies  and  the  ma- 
chinery used  by  thorn  were  hai'dlv  more  than  experiments, 
construction  was  cheaply  done.  Today  machinery  of  known 
efficiency  is  used  and  construction  is  of  the  most  pennanent 


PUBLIC  SERVICE  CORPORATION  BONDS     337 

and  expensive  character.  Cheap  things  are  seldom  eco- 
nomical and  they  are  never  so  in  the  matter  under  discus- 
sion. Therefore  bonds  issued  today  by  public  utility  com- 
panies constitute  a  lien  on  exceedingly  valuable  physical 
property,  the  working  life  of  which  is  known  before  the 
careful  banker  invests  his  money  in  them. 

The  matter  of  present  and  prospective  earnings  is  also 
an  important  one.  While  no  definite  rule  can  be  laid  do\^Ti 
as  applicable  to  all  cases,  careful  banking  houses  require 
that  net  earnings  shall  largely  exceed  all  bond  interest,  the 
usual  requii'ement  being  that  they  shall  amount  to  from  one 
and  one-half  times  to  twice  said  interest.  With  present  earn- 
ings equalling  said  amounts,  with  estimated  future  earn- 
ings maintaining  the  same  proportion  of  safety,  and  with 
the  issuance  of  treasury  bonds  carefully  restricted  by  mort- 
gage provisions,  not  only  are  present  values  established  but 
adequate  future  values  are  insured  also.  Not  only  do  in- 
vestment bankers  of  the  best  standing  today  insist  upon  all 
these  requirements  but  they  go  much  further  to  protect  their 
own  interests  and  those  of  their  customers.  They  employ 
the  best  legal  talent  obtainable  to  examine  into  the  legal- 
ity of  franchises,  to  pass  upon  titles  to  property,  to  prepare 
mortgages  and  contracts,  to  attend  to  all  the  legal  require- 
ments of  the  or2:anization  and  operation  of  public  service 
corporations  and  the  issuance  of  their  securities.  Resolu- 
tions passed  by  directors,  the  minutes  of  their  meetings  and 
tlie  votinc:  of  stockholders  are  supervised  by  lawyers  of 
high  standing  in  the  field  of  corporation  law.  The  banker 
also  insists  that  mortgages  and  contracts  shall  contain  pro- 
visions which  the  companies  frequently  consent  to  reluc- 
tantly, but  which  are  insisted  upon  because  experience  has 
taught  that  they  are  necessary  to  insure  the  future  safety 
of  the  bonds  he  is  to  offer  for  sale.  One  of  the  most  com- 
mon of  these  requirements  is  that  restricting  the  future  is- 
suance of  treasury  bonds.  Not  only  must  present  earnings 
justify  the  initial  issue  but  the  bankers  require  that  further 

B.VII— 22 


338  THOMAS  W.  SIMMONS 

Ijoiids  shall  not  ho  issued  unless  the  present  ratio  of  net  earn- 
in<i-s  to  bond  interest  shall  be  maintained.  Another  jirovi- 
sion  of  iniiHU-tance  is  that  which  permits  the  issuance  of 
treasury  bonds  only  to  the  extent  of  a  certain  percentage  of 
the  cost  of  future  extensions,  imjirovements  or  acquisitions 
of  property.  This  usually  ranges  from  GO  to  85  per  cent. 
Such  restrictions,  while  permitting  bonds  to  be  issued  in  the 
interest  of  increasing  ])usiness,  put  a  chock  u]ion  manage- 
ment which  if  unchecked  might  be  prejudicial  to  the  inter- 
ests of  security  holders. 

AVhile  the  foregoing  describes  many  safeguards  now 
throTMi  around  carefully  issued  public  service  cor]ioration 
bonds  and  is  sufficient  to  show^  the  marked  contrast  between 
present-day  issues  and  those  of  former  times,  the  precau- 
tions recited  by  no  means  constitute  all  the  safeguards  at 
present  employed.  A  potent  factor  in  the  organization  and 
management  of  public  service  corporations  in  many  states 
today  is  the  public  service  commission.  These  ccnmnis- 
sions,  when  clothed  with  proper  legal  authority,  are  at  once 
both  the  corporation's  and  the  security  holder's  guardian 
and  best  friend.  On  one  hand  they  protect  the  corporation 
against  ruinous  competition,  and  on  the  other  insure  the  in- 
vestor against  the  issuance  of  securities  which  do  not  ro]u-e- 
sent  reasonable  values.  These  commissions  not  only  limit 
the  nniount  of  capitalization  but  they  go  further  and  pre- 
scribe the  purposes  for  wdiich  the  proceeds  of  bonds  shall 
be  expended.  They  also  frequently  recpiire  the  establish- 
ment of  amortization  funds  which  insure  the  proper  main- 
tenance of  pi'operties. 

AVhile  such  commissions  sometimes  incur  the  strong  op- 
position of  comj)anics  under  their  control  ])y  limiting  charg- 
es for  electric  railway  transportation  and  for  gas  and  elec- 
tric light  service,  they  often  prove  to  be  the  corporation's 
best  friend  by  this  very  regulation,  for  such  service  gener- 
ally insures  a  satisfied  public  which  in  turn  often  consti- 
tutes the  company's  most  valuable  asset.    Another  benefit  to 


PUBLIC  SERVICE  CORPORATION  BONDS     339 

the  corporation  which  has  attended  regulation  of  capitaliza- 
tion, is  the  increased  confidence  it  gives  the  investor.  This 
not  only  enables  the  corporation  to  finance  its  needs  more 
easily,  but  as  the  commission  prescribes  the  minimum  price 
at  wliich  the  company  may  sell  its  bonds,  it  frequently  re- 
sults in  enabling  it  to  obtain  a  higher  price  than  would  oth- 
erwise be  the  case.  For  a  long  time  there  was  a  deep-seated 
antagonism  on  the  part  of  public  utility  companies  to  the  in- 
terference of  public  service  commissions.  This  antago- 
nism is  fast  disappearing  and  so  salutary  have  many  of  the 
commission's  requirements  proved  to  be  that  some  large 
holding  companies  which  ot^^i  and  operate  properties  in 
states  which  have  no  such  commissions,  have  adopted  many 
of  the  rules  relative  to  amortization  and  other  matters  which 
have  been  prescribed  by  commissions  in  other  states. 

The  foregoing  deals  only  with  public  utility  companies, 
but  as  the  bonds  of  such  corporations  are  offered  to  the  in- 
vestor in  competition  with  railroad  and  industrial  issues,  it 
is  pertinent  to  this  article  to  compare  the  respective  desir- 
ability of  these  classes  of  investments.  However,  industrial 
propositions  are  so  directly  affected  by  business  depressions, 
or  the  reverse,  as  well  as  by  the  dangers  of  competition,  and 
they  have  so  little  in  common  with  the  other  two  classes,  that 
their  merits  as  investment  securities  must  usually  be  con- 
sidered either  from  the  standpoint  of  very  large  income 
Afield  or  the  opportunities  they  sometimes  afford  for  profits 
through  wide  market  fluctuations.  Therefore  they  may 
properly  be  omitted  from  this  comparison.  Tt  is  however 
freely  admitted  that  some  industrial  issues  do  constitute  sat- 
isfactory investments.  The  other  two  classes  have  much  in 
common  and  may  properly  be  compared.  The  scope  of  this 
article  will  not  pennit  more  than  a  passing'  word  in  this  con- 
nection, and  we  shall  therefore  be  content  to  call  attention 
to  but  a  few  of  the  argmnents  most  frequently  advanced  in 
favor  of  public  service  corporation  l)onds  over  those  of 
the  railroad  class.    Some  of  these  are  the  following: 


340  THOMAS  W.  SIMMONS 

(a)  It  is  practically  impossible  today  to  obtain  first 
mortgage  railroad  bonds  on  large  systems  at  prices  that 
yield  a  satisfactory  income  to  indiyidual  inyestors,  while 
first  mortgage  bonds  issued  by  representatiye  public  seryice 
corporations  are  still  obtainable  on  from  a  4.90  to  a  5J  per 
cent  basis. 

(b)  Such  junior  lien,  refunding  or  consolidated  mort- 
gage railroad  bonds  as  are  at  present  obtainable  on  a  satis- 
factory income  basis,  are  either  secured  by  a  mortgage  on 
some  segregated  part  of  a  large  system,  or  else  they  are  so 
com})letely  dominated  by  prior  liens,  that  in  case  of  fore- 
closure the  holders  would  be  completely  at  the  mercy  of 
larger  or  preferred  interests.  In  contrast  with  this,  public 
seryice  corporations  are  usually  in  such  great  demand  and 
they  so  commonly  come  within  the  power  of  competing  bank- 
ers to  finance  that  the  holders  of  the  bonds  of  such  companies 
enjoy  a  protection  that  is  impossible  to  the  holders  of  rail- 
road bonds  of  the  class  last  mentioned.  The  pul)lic  seryice 
corporation  bond  is  generally  secured  by  a  mortgage  lien  on 
a  yaluable  segregated  property  for  which  there  would  be 
many  competitiye  l)idders  in  the  eyent  of  foreclosure,  while 
the  railroad  issues  referred  to  are  in  most  cases  a  lien  on 
only  a  part  of  a  great  system,  the  chief  yalue  of  which  is  to 
the  system  to  which  it  belongs,  and  for  which,  in  case  of  fore- 
closure, there  would  probably  be  no  competitiye  bidding. 

(c)  Railroads  are  mainly  dependent  for  tonnage  either 
upon  manufacturing  enterprises,  such  as  the  large  steel 
interests,  etc.,  or  upon  crops,  and  therefore  during  periods 
of  industrial  depression  or  in  the  eyent  of  serious  crop 
failure  their  earnings  fall  off  tremendously.  On  the  other 
hand  public  service  corporations  furnishing  gas.  electric 
railway  or  electric  light  seryice  have  shown  surprising  sta- 
bility in  earnings,  even  during  financial  panics  and  pro- 
longed periods  of  industrial  inactivity.  Experience  has 
shown  that  people  use  almost  as  much  gas  and  electricity 
for  lighting  purposes  and  ride  on  street  cars  almost  as  much 


PUBLIC  SERVICE  CORPORATION  BONDS     341 

in  bad  times  as  in  good  times.  Many  public  utility  com- 
panies actually  showed  increased  earnings  during  the  panic 
of  1907  and  the  dull  business  year  of  1908,  while  a  very  large 
percentage  maintained  their  former  rate  of  earnings  during 
said  time. 

(d)  In  periods  of  disturbed  condition  in  the  stock  mar- 
ket active  listed  railroad  bonds  often  fluctuate  widely  in 
price  for  reasons  entirely  independent  of  those  which  affect 
the  security  behind  the  bonds.  Such  issues  are  frequently 
carried  in  margin  accounts  and  as  prices  fall  margins  are 
wiped  out  and  bonds  are  forced  for  sale  with  a  consequen- 
tial further  drop  in  quotations.  The  same  is  not  true  of  the 
great  majority  of  public  service  coi-poration  issues.  These 
are  seldom  listed  on  stock  exchanges,  are  infrequently 
bought  for  speculative  purposes  and  they  are  therefore  not 
often  carried  on  margin.  Quotations  on  such  issues  are 
generally  not  the  subject  of  violent  fluctuations.  While  a 
general  market  disturbance  will  undoubtedly  affect  their 
quotations  to  some  extent,  some  interesting  statistics  have 
been  comjiiled  w^hich  tend  to  show  that  the  decline  which 
such  issues  experience  in  a  falling  stock  market  averages 
only  about  one-third  of  that  experienced  by  active  listed 
railroad  bonds. 

The  investor  who  has  read  the  foregoing  will  naturally 
ask  the  question,  "If  so  much  care  is  necessary  in  determin- 
ing the  safety  of  public  service  corporation  bonds,  how 
may  they  be  safely  bought  by  those  who  have  funds  seeking 
investment?"  A  complete  and  satisfactory  answer  to  this 
question  and  one  that  will  cover  all  cases  cannot  be  given, 
but  there  are  a  few  rules,  which,  if  followed,  all  except  min- 
imum business  risks  will  be  eliminated  and  more  than  this 
the  average  investor  does  not  require.  When  more  is  nec- 
essary investments  should  be  sought  only  among  Govern- 
ment, municipal  or  underlying  first  mortijage  issues  which 
yield  only  from  about  2  to  4  per  cent.  The  few  important 
rules  referred  to  are  as  follows : 


342  THOMAS  W.  SIMMONS 

1st.  Never  buy  bonds  on  a  purely  consti-uetion  propo- 
sition. Such  issues  sometimes  turn  out  satisfact(>rily  ])ut 
the  percentage  of  such  cases  is  so  small  that  it  docs  not  afifcct 
the  general  application  of  the  rule.  Construction  proposi- 
tions necessarily  include  manv  uncertain  elements;  (»riginal 
estimates  of  cost  are  frequently  exceeded,  unlooked  f(»r  de- 
lays in  completion  are  generally  encountered,  time  is  al- 
ways necessary  to  demonstrate  the  earning  power  of  even 
good  i)roperties,  and  in  the  meantime  hnancial  burdens 
incident  t(^  all  these  thiniis  must  be  carried  ])v  the  banking 
interests  which  are  backing  the  i)roposition.  Such  ven- 
tures are  inconsistent  with  the  elements  of  stability  and 
safety  necessary  to  strictlv  investment  securities.  Such 
undertakings  are  in  the  very  nature  of  things  speculative 
and  while  the  final  outcome  is  often  profital)le  the  average 
investor  cannot  afford  to  take  the  risk,  and  perhaps  those 
who  can  had  better  not  subject  themselves  to  the  worry,  anxi- 
ety and  delay  which  attend  the  average  construction  propo- 
sition. 

2nd.  Select  only  bonds  on  large  properties  which  oper- 
ate in  established  and  thickly  populated  comnuniities.  These 
are  free  from  many  hazards  incidental  to  small  ])roperties. 
The  latter  maj^  be  seriouslv  affected  ])v  accidents  or  bv  even 
one  negligent  act  which  may  result  in  a  verdict  for  heavy 
damages  on  account  of  death  or  injury  which  may  i-esult. 
Then  too  small  companies  do  not  often  enjoy  the  possibility 
of  large  increases  in  earnings  which  attend  the  ra]ud  growth 
of  population  in  large  connnunities.  Another  advantage^ 
in  large  issues  is  the  bi'oader  market  which  is  created  for 
them,  making  them  more  readily  saleable  and  theref(U"e 
more  desirable  to  those  who  seek  an  investment  which  mav 
be  quickly  coiiverted  into  cash  whenever  occasion  requires. 

3rd.  A  very  important  rule  to  follow  is  to  avoid  the  se- 
curities of  companies  which  operate  in  what  is  commonly 
called  a  **one  industry  conununity."  Such  com]^anies  fre- 
quently enjoy  long  periods  of  prosperity  only  to  see  earnings 


PUBLIC  SERVICE  CORPORATION  BONDS     343 

suddenly  decrease  enormously  on  account  of  a  cessation  of 
activity  in  the  particular  industry  upon  which  the  entire 
prosperity  of  the  community  depends. 

4th.  Statements  of  actual  earnings  should  be  required 
and  these  should  be  carefully  scrutinized  to  ascertain  the  re- 
lation of  operating  expenses  to  gross  income,  while  net  earn- 
ings should  be  carefully  considered  in  comparison  with  fixed 
charges.  Usually  net  earnings  ranging  from  50  per  cent 
to  100  per  cent  in  excess  of  total  bond  interest  should  be  in- 
sisted on,  and  of  course  interest  on  general  bills  payable 
nuist  be  regarded  if  the  ])ills  payable  account  be  large. 

5th.  There  yet  remains  the  most  important  rule  of  all. 
If  this  be  invariably  followed  all  other  rules  may  be  ignored. 

Deal  Only  with  Reliable  Bankers. 

Investment  bond  houses  of  the  best  type  have  for  so  long 
been  telling  investors  that  their  best  safeguard  lies  in  deal- 
ing T^^th  a  properly  equipped  house  of  the  highest  standing, 
that  many  are  now  acting  on  this  advice,  realizing  that  it  is 
not  either  feasible  or  possible  for  even  the  most  experienced 
and  best  informed  investor  to  properly  pass  upon  the  mer- 
its of  securities.  It  is  certain,  however,  that  very  few,  even 
of  those  who  follow  this  advice,  fully  realize  how  wise  and 
necessary  such  a  course  really  is. 


FORECASTING  TRADE  CONDITIONS  BY  THE  AREA 

THEORY. 

BY  ROGER  W.  BABSON. 

[Author  of  "Standard  Business  Barometers,"  etc.] 

History  of  Plots  and  Charts. 

From  time  immi'morial  men  have  been  making  plots 
with  the  idea  of  forecasting  trade,  meteorological,  astro- 
nomical and  other  conditions.  The  earliest  plots  of  which 
we  find  record  are  those  prepared  by  the  Eg^-ptians, 
remnants  of  which  exist  on  monuments  and  stone  tablets. 
We  find  that  the  rise  and  fall  of  the  Nile  River  was  charted 
by  the  statistical  department  of  the  Pharaohs  for  the  pur- 
pose of  forecasting  future  changes  in  the  height  of  the  river. 

The  Greeks  also  devoted  considerable  attention  to  the 
study  of  charts  and  plots,  although  their  work  was  more 
along  astronomical  lines.  They  charted  the  heavens  and 
worked  out  verv  interestinc;  and  intricate  charts  wherebv 
they  thought  they  could  forecast  future  storms  and  other 
events.  The  Romans  also  studied  charts  with  the  idea  of 
forecasting  trade  conditions,  and  in  a  work  which  I  am  now 
reading  on  the  conditions  of  Roman  trade  at  the  time  of 
Julius  Caesar,  some  very  interesting  data  are  given,  wliile 
the  records  of  Genoa  and  Venice  show  clearly  the  attempts 
which  their  merchants  made  along  these  lines. 

As  is  well  known,  Columbus  and  his  contemporaries, 
Sir  Walter  Scott  and  his  contemporaries,  and  others,  made 
studies  similar  to  much  being  done  today;  but  space  will  not 
permit  us  to  go  into  further  detail  concerning  the  histor- 
ical end  of  this  work.  Sufficient  it  is  to  say  that  all  of  these 
charts  were  based  simply  on  one  dimension.  As  the  old 
philoso])hers  believed  the  W(U-ld  was  flat  and  missed  the 
other  factor  in  their  geographical  studies,  so  they  all  seemed 

344 


5§f 


-  •   ■   •  -3  >>  ~  /.  "  ':j  - 
c^  ij  s  3  r      r-x 


0IB3S  '-"H 

'    •  d     -C      o  •<-•       .'  °  1.  S "  .-  -      ^ 


S 


52SSK§?i^fHSSSi5;j«-  =  -''^^^^?-.S^-* 


T 


Cm 


3°~  =  c      rcj"-"'"-r-;_t£.-'^ 


•=''*^.3 


S  li 


•3     '^'■o        ii"^ ''■°  o-r  oS  1  > 
''■aj:  ad  3- 3  is  ,^  a-£     ^;:---- 


.  ■  — 


^  c 


-3bC3'^         BCl-^O^^        _'-&JCn 

o  =»  S.-- ;i  "^  iJ  :,  u  -  rt       -      Cc=^^~a 


-    =•  = 


-  i--i-'^  5. •=><-=« 


X 


r  i  X 


V.   ""  "^ 


9|BJS    •"'« 


— *        *     '*'!     ■^    ^     O     "-C     '^^ 

z  .-  i»  2  3  ^  •'s  -Ai 


5  ?  3  ?S  P?  S  S  R  ^  -: 


^pvc'^i5r-r  =  -=-«:L'£S?;?3f>;>^ 


FORECASTINa  TRADE  CONDITIONS         345 

to  miss  the  importance  of  considering  the  second  dimen- 
sion in  their  studies  of  charts.  In  other  words,  up  to  with- 
in the  past  decade,  all  charts  of  business  and  trade  con- 
ditions have  been  based  either  on  the  record  of  time  or  the 
record  of  intensity,  and  have  been  what  are  known  as  single 
line  charts. 

One  Vital  Error  of  Past  Work. 

For  instance,  when  the  Egj^tians  charted  the  flow  of 
the  river  Kile,  they  considered  simply  the  height  of  the 
water  and  not  the  force  at  which  it  was  flowing.  In  the 
same  way,  when  economists  have  charted  the  prices  of 
conmiodities,  they  have  simply  considered  the  height 
reached  by  these  prices  without  considering  the  period  of 
time  during  which  these  prices  have  remained  high  or  low. 
If,  for  instance,  the  normal  price  of  wheat  is  $1.00  a  bushel 
and  the  previous  high  point  was  $1.50  a  bushel,  they  have 
considered  the  price  of  $1.25  as  only  a  medium  high  price, 
believing  that  the  next  upward  movement  would  approxi- 
mately reach  and  perhaps  exceed  $1.50  before  the  market 
turned.  In  short,  thev  have  failed  to  recognize  that  it  con- 
sumed  as  much  "energy,"  so  to  speak,  to  keep  the  price 
at  $1.25  for  a  year  or  more  as  it  would  to  keep  it  at  $1.50 
for  a  few  months.  Therefore,  the  vital  point  to  remember 
about  the  Area  Theory  is,  that  when  prices,  clearings,  fail- 
ures, earnings,  etc.,  remain  at  medium  high  figures  for  a 
long  period  of  time,  it  is  equivalent  to  their  being  at  a  much 
higher  figure  for  a  short  period  of  time. 

The  Same  Error  Prevailed  Throughout  All  Scientific  Study. 

Not  only  did  the  old  philosophers  and  economists  make 
this  mistake  of  considering  one  dimension  in  their  study 
of  trade  and  finance,  but  also  made  the  same  error  in  their 
study  of  mechanics,  chemistry,  medicine,  astronomy  and 
all  of  the  sciences.  Comparatively  speaking  it  was  only  a 
short  tune  ago  that  engineers  began  to  base  their  work  on 


346  ROGER  W.  BABSON 

the  foot-poinids  roiisiimcd,  instead  of  tlie  one  factor  of  space 
or  weii^lit.  W'licn  our  universities  were  first  founded,  a 
force  was  not  considei'ed  tlie  jirodurt  of  two  factors.  It  was 
not  tlioup^lit  that  it  required  the  same  enei-,c:y  to  move  one 
pound  tlirou«j:li  TOO  feet  of  space  as  to  ninvc  100  ])(>unds 
throu^di  one  foot  of  space.  The  law  of  ''action  and  reaction 
heing  equal  when  the  total  force  involved  is  considered" 
was  not  recopiized  ]\v  the  scientists  until  some  time  after 
Newton  died.  We  wlio  graduated  from  leading  universities 
witliin  the  jiast  few  years  are  accustomed  to  think  that  the 
law  of  action  and  reaction  has  always  been  taught  in  con- 
nection with  scientific  studies ;  but  such  is  not  the  case. 

The  Area  Theory  Is  not  New  Except  as  Applied  to  Trade 

and  Finance. 

Therefore,  the  adaptation  of  this  great  law  to  economics 
and  psychology"  is  not  a  new  departure,  hut  sim]dy  a  ])art 
of  an  evolution  which  has  been  going  on  in  all  the  other 
sciences  during  the  past  200  years,  and  has  only  recently 
reached  its  present  state  of  perfection.  Therefore,  the  first 
point  which  I  wish  to  impress  upon  you  is  that  practically 
all  previous  chart  work  has  been  based  on  only  one  dimen- 
sion, namely,  either  time  or  intensity,  ancl  not  upon  their 
product;  and  secondly,  I  wish  to  impress  \^M^^^  you  that 
the  present-day  work,  in  which  T  am  so  greatly  interested, 
is  not  based  upon  one  dimension  but  upon  the  product  of 
two  dimensions.  This  simply  brings  economics  and  ]isy- 
ehological  investigations  up  to  the  same  ]^oint  to  whieh 
chemistry,  mechanics,  astronomy  and  the  other  sciences  have 
progressed. 

Description  of  Composite  Plot. 

So  much  for  the  theorv  involved,  and  now  n  word  con- 
ceming  the  concrete  case  whieh  we  are  discussing  here, 
namely,  that  of  forecasting  trade  conditions  by  the  Com- 
posite Plot  of  business  conditions.    (See  page  344.)    This 


FORECASTING  TRADE  CONDITIONS         347 

plot  is  a  bird's-eye  view  of  business  conditions  in  the  United 
States  from  January  1,  1903,  up  to  the  present  time,  a 
period  of  over  seven  years.  In  our  compiling  offices,  we 
have,  of  course,  this  plot  going  back  much  farther  and 
worked  out  on  various  different  lines;  but  the  plot  placed 
before  you  covering  the  past  seven  years  is  suliicient  for 
explanatory  purposes.  The  outline  of  this  area  shows  the 
fall  and  rise  in  business  conditions  during  these  seven  years, 
and  how  this  chart  is  made  up  I  will  explain  later.  What 
I  now  wish  to  emphasize  is  that  the  theory  of  this  plot  is 
based  on  the  great  law  of  action  and  reaction  about  which 
I  have  spoken.  This  plot  you  will  see  consists  of  four  areas, 
and  we  will  call  them  A,  B,  C,  and  D.  It  will  be  seen  that 
each  area  consists  of  two  dimensions,  the  horizontal  width 
which  represents  time,  and  the  depth  or  height  which  rep- 
resents the  intensity  of  the  period  of  depression  or  the 
period  of  prosperity,  according  to  whether  the  area  is  below 
or  above  the  slanting  line  of  growth. 

No  Reason  for  the  Areas  Being  of  Similar  Shape. 

Now  the  old  idea  was  that  the  periods  of  depression  and 
prosperity  must  come  with  some  regularity;  that  is,  that 
we  must  have  a  period  of  depression  every  so  many  years. 
After  the  days  of  Joseph,  the  Eg>^:)tians  thcnight  that  this 
must  come  every  seven  years,  while  certain  financial  writers 
nowadays  think  it  must  come  either  every  ten  or  twenty 
years;  but  no  definite  regularity  can  be  counted  upon,  as  it 
all  depends  upon  the  intensity  of  the  period.  If  the  de- 
pression is  very  severe,  conditions  will  mend  very  quickly 
and  it  will  be  of  short  duration;  or  if  the  period  of  pros- 
perity is  reckless  and  extraordinary,  it  can  last  only  a  rela- 
tively short  time.  On  the  other  hand,  if  the  depression  is 
slight,  it  will  take  some  years  to  readjust  conditions;  and  in 
the  same  way,  if  the  period  of  prc^sperity  is  moderate,  it  will 
last  a  longer  number  of  years.  Therefore,  the  position 
taken  by  many  financial  writers  that  history  will  repeat 


348  ROGER  W.  BABSON 

itself,  and,  as  panics  have  come  T\'ith  certain  regularity  at 
times  past,  said  regularity  will  continue  in  the  future,  has 
absolutely  no  economic  basis.  In  the  same  way,  those  who 
believe  that  prices  must  reach  a  certain  height  before  they 
turn  to  go  d(n\iiward,  or  must  reach  a  certain  low  point  be- 
fore they  can  turn  to  go  ui)ward,  are  absolutely  wrong  in 
their  assumptions.  Ever^-thing  depends  on  the  product  of 
the  two  factors  and  not  upon  either  factor  independently. 

What  the  Areas  Show. 

Therefore,  to  apply  this  theory  to  the  plot  before  us, 
we  see  that  the  only  feature  worthv  of  studv  is  not  the 
length,  or  breadth,  or  height  or  dti)tli  of  these  four  areas, 
but  rather  the  product  of  their  lengths  and  breadths,  name- 
ly, their  area  in  square  inches.  It  is  the  area  which  repre- 
sents business  conditions :  area  A  represents  the  depression 
of  1903  and  1904;  area  B,  the  period  of  prosperity  of  1905 
and  1906;  area  C,  the  depression  of  1907  and  1908;  and 
area  D,  the  present  period  of  prosperit}^  which  our  great 
West  is  now  enjoying.  Granting,  however,  that  these  areas 
show  the  business  conditions  of  the  country  during  the  past 
few  vears,  von  now  ask  how  these  areas  can  be  used  for  fore- 
casting  trade  conditions,  and  I  can  very  briefly  and  plainly 
answer  this  point. 

The  Areas  Should  Theoretically  be  Equal. 

Granting  that  the  black  line  represents  the  normal  line 
of  growth  of  the  country,  and  the  outline  of  the  black  areas 
the  condition  of  trade,  then  these  areas  must  be  absolutely 
equal.  For  if  this  country  were  willing  to  grow  normally, 
we  should  have  no  periods  of  reckless  prosperity  or  periods 
of  depression ;  but  for  all  that  we  go  above  this  normal  line 
of  growth,  we  must  rest  a  corresponding  amount  below  it, 
although— and  this  is  the  important  point  to  remember— 
we  take  our  rest  in  areas  and  not  in  depth.  In  other  words, 
a  veiy  shallow  area  extending  over  a  long  number  of  years 


FORECASTING  TRADE  CONDITIONS  349 

is  equivalent  to  a  very  deep  area  extending  over  one  or  two 
years.  I  will  repeat  this  important  point;  namely,  that  if 
the  black  line  represents  the  line  of  growth  and  the  area  of 
the  black  plots  represents  the  condition  of  trade,  then  these 
areas  must  be  absolutely  equal,  from  the  law  that  action 
and  reaction  are  equal  when  the  total  force  is  considered. 
Of  course,  it  is  impossible  with  the  present  data  which  the 
Government  supplies  to  get  this  line  of  growth  correct. 
Moreover  the  black  areas  are  made  up  of  only  a  compara- 
tively few  subjects,  when  they  should  doubtless  contain 
many  more.  Therefore  in  practice  these  areas  will  not  be 
equal ;  but  they  should  be  near  enough  equal  for  practical 
purposes  in  forecasting  trade  conditions.  So  much  for  the 
first  statement. 

How  to  Forecast  the  Future  by  the  Area  Theory. 

Now,  granting  that  these  areas  must  be  equal,  it  will  be 
seen  that  the  present  period  of  prosperity  is  about  two- 
thirds  consumed,  and  that  one-third  remains.  Therefore, 
to  forecast  trade  conditions,  it  is  simply  necessary  to  ascer- 
tain how  long  we  shall  be  in  consuming  this  remaining 
third.  The  plot  shows  at  a  glance  that  a  period  of  read- 
justment is  ahead  and  that  the  next  great  movement 
must  be  below  the  line  of  growth;  but  we  wish  to  know 
more  than  that ;  namely,  how  long  it  will  be  before  we 
enter  this  depression?  This  depends  upon  the  *'rate  of 
flow,"  so  to  speak;  if  conditions  will  moderate,  we  may  be 
two  or  three  vears  consuminc:  this  remainincr  third  of  the 
period.  On  the  other  hand,  if  the  throttle  is  opened  wide 
and  conditions  are  pushed  and  business  is  forced,  we  may 
use  it  up  in  a  comparatively  few  months. 

Therefore,  to  return  to  the  subject  of  forecasting  trade 
conditions,  it  vriW  be  seen  at  a  glance  that,  based  on  the 
area  theory,  we  are  facing  a  period  of  readjustment  or  de- 
pression to  be  worked  out  below  the  line  of  growth,  and 
that  this  depression  will  probably  come  sometime  within 


350  ROGER  W.  BABSON 

the  ucxt  few  years,  cloi)C'iKliiig  on  the  rate  of  flow  which  can 
only  be  told  by  watching  this  plot  each  week.  If  each  week 
it  increases  in  height,  we  niay  be  sure  that  the  period  of 
depression  is  rapidly  approaching.  On  the  other  hand,  if 
it  decreases  in  height  and  business  flattens  out  and  keeps 
only  a  little  above  the  line  of  growth,  it  is  safe  to  assume 
that  present  trade  conditions  will  last  for  two  or  three  years 
more. 

Subjects  Upon  Which  the  Composite  Plot  Is  Based. 

These  Composite  Plots  may  be  made  in  various  ways 
and  based  on  figures  of  almost  an  unlimited  number  of  sub- 
jects; but  after  talks  with  loading  economists  and  psy- 
chologists throughout  the  world,  our  work  is  conlined  to 
the  subjects  under  the  following  twelve  headings: 

MercantUc  Conditions. 
Innnigration. 
Bank  Clearings. 
Failures. 
New  Building. 

Monetary  Conditions. 

Domestic  Money  Rates. 
Surplus  Reserves. 
Foreign  ^loiiey  Rates. 
Commodity  Prices. 

J n vestment  Conditions. 

Stock  Market  Conditions. 
Condition  of  Leading  Crops. 
Political  Conditions. 
Railroad  Earnings. 

Had  T  space,  T  would  take  up  each  of  these  twelve  sub- 
jects in  detail,  showing  the  figures  l)y  months  for  ten 
years,  and  the  figures  by  jienrs  back  to  the  Civil  War,  with 
each  subject  illustrated  by  a  distinct  and  separate  chart. 


FORECASTINa  TRADE  CONDITIONS         351 

Individual  Charts  Are  Also  Useful. 

Such  iudividual  charts  also  show  graphically  the  trend 
of  conditions  and  the  relation  of  trade  today  with  similar 
periods  during  previous  cycles.  Although  these  individual 
cliarts  cannot  be  depended  upon  of  themselves,  they  are  dis- 
tinctly helpful  in  checking  the  Composite  Plot.  If  the  Com- 
posite Plot  increases  in  height,  it  is  well  to  note  the  indi- 
vidual plots  and  ascertain  to  what  this  is  due.  Not  only 
are  some  subjects  of  more  importance  than  others,  but  cer- 
tain subjects  may  be  especially  affected  by  specific  condi- 
tions which  are  more  accidental  than  fundamental.  More- 
over the  individual  charts  are  of  great  value  in  studying 
certain  subjects,  as,  for  instance,  banking  conditions.  Thus, 
in  addition  to  studying  the  Composite  Plot,  which  enables 
one  to  forecast  the  broad  monetary  conditions,  one  ought  to 
give  special  attention  to  the  following  separate  charts: 

Relation  of  Loans  to  Deposits, 

Relation  of  Loans  to  Aggregate  Resources, 

Relation  of  Reserves  to  Deposits, 
together  with  several  other  charts  which  I  might  mention, 
such  as  Failures,  Clearings,  etc. 

An  Illustration  Showing  the  Use  of  a  Chart  on  Bank 

Clearings. 

Few  bank  men  understand  the  true  significance  of  the 
chart  on  Bank  Clearings.  For  instance,  go  back  tomoTrow 
and  ask  an  officer  of  your  liank  what  the  chart  of  Bank 
Clearings  shows,  and  he  will  tell  you  that  it  shows  only 
the  activitv  of  general  trade.  This  is  true;  but  it  does  not 
give  a  hint  of  the  dangerous  feature  of  large  Bank  Clear- 
ings. If  increased  Bank  Cleai'ings  si]n]ily  show  increased 
trade,  the  larger  the  cleariiigs  the  better,  and  a  constant 
.gro\^i:h  would  ])e  distinctly  favorable.  Large  Bank  Clear- 
ings, however,  show  something  mueh  more  vital.  They 
show  the  rapidity  with  which  money  is  being  circulated. 


352  ROGER  W.  BABSON 

They  show  the  extent  to  which  our  currency  is  inflated,  as 
a  dollar  passing  through  six  hands  in  one  week  answers 
the  same  purpose  as  do  six  dollars  passing  through  one 
hand  during  the  week.  In  other  words,  our  currency  is  not 
only  inflated  by  the  use  of  paper  money  and  credit  in  its 
various  diversified  forms,  but  is  being  inflated  by  our  huge 
bank  clearim^  svstem.  Some  dav  this  clearing  svstem  will 
receive  a  iar  which  will  bring  a  financial  and  monetarv 
]ianic  on  this  country  which  has  not  been  seen  since  1837. 
Money  circulated  in  this  way  at  such  a  rapid  rate  as  sho\Mi 
bv  the  chart  on  Bank  Clearings,  when  retarded,  will  receive 
a  shock  which  will  have  the  same  effect  as  suddenly  de- 
stroying a  large  proportion  of  our  actual  currency.  Space, 
however,  will  not  permit  us  to  study  the  charts  independ- 
ently and  therefore  I  am  simply  describing  our  Composite 
Plot,  so-called,  which  is  a  combination  of  these  various 
figures  and  charts  into  one  chart. 

General  Description  of  the  Composite  Plot. 

This  Composite  Plot  may  be  made  in  two  ways.  We  could 
first  make  individual  plots,  and  then  take  a  composite  photo- 
graph of  them  all ;  but  in  practice  there  is  a  much  simpler 
way.  This  simpler  way  is  to  take  the  latest  figures  on  all  of 
these  subjects,  and,  by  barometer  scales,  combine  and  re- 
duce all  these  figures  to  one  common  index  number,  on 
the  same  principle  as  used  by  the  London  Economist  for 
combining  and  reducing  the  prices  of  a  large  numlier  of 
commodities  to  one  index  number.  This  index  number  we 
then  plot,  taking  January,  1903,  as  '*0."  Of  course,  theoreti- 
cally there  is  no  reason  why  we  should  call  conditions  exist- 
ing at  that  time  as  "0"  any  more  than  ''plus  25"  or  **minus 
25";  but  for  convenience  we  start  with  "0"  i]i  1003.  You 
will  note  that  the  period  itself  really  starts  with  the  first  of 
February,  1903.  at  about  *'3"  and  as  each  little  square  rep- 
resents one  month,  it  will  be  noticed  that  the  first  two  weeks 
of  Febniarv  trade  r(^nditions  remained  about  constant:  but 


FORECASTINa  TRADE  CONDITIONS         353 

the  last  two  weeks  tliey  advanced  about  five  points  to  "8." 
During  the  month  of  March  trade  conditions  advanced 
about  one  point,  while  during  April  they  dropped  down  to 
about  ''2."  From  this  point  it  is  very  easy  to  follow  trade 
conditions  by  the  edge  of  the  black  area.  When  this  is  un- 
derstood, our  periods  of  depression  and  prosperity  stand 
out  vei*v  clearlv. 

Illustrating  How  the  Figure  Was  Derived  January,  1910. 

As  during  my  talks  last  year  in  this  countrj'  and  Europe, 
I  was  continually  being  asked  how  this  Composite  Plot 
was  made,  I  will  now  explain  this  in  detail,  taking  January, 
1910,  as  a  typical  month. 

First,  let  me  exj^lain  the  meaning  of  certain  terms: 

Actual  Figures.— V^^e  call  all  figures  as  reported,  Actual 
Figures.  These  arc  the  regTilar  statistics  familiar  to  every- 
one. These  Actual  Ficr^n-es  are  in  manv  denominations. 
For  example.  Bank  Clearings  are  expressed  in  dollars,  Crop 
Production  in  bushels,  Inunigration  in  number  of  people 
arriving,  certain  railroad  statistics  in  number  of  cars,  etc. 

Index  Figures.— To  comliine  all  these  in  one  figure,  it  is 
necessary  to  do  away  with  these  different  denominations, 
and  express  all  in  one  abstract  figure,  or  Index.  That  is, 
all  Actual  Figiu^es  must  be  compared  by  means  of  some  one 
principle. 

Scale  Figures.— To  accomplish  this,  we  introduce  a  set 
of  intennediate  figures  called  the  Scale  Figures. 

The  steps  by  whieh  these  Scale  and  Index  Figures  are 
obtained  are  as  follows:  Take,  for  instanee,  the  Actual 
Figures  for  Inunigration  from  1898  to  1908,  inchisive.  The 
Actual  Figure,  18,300,  for  the  year  1901  was  found  to  be 
the  lowest  for  that  month  of  the  ten  year  period  and  was 
placed  at  the  lower  end  of  the  Scale  Table  for  January. 
56,200  (in  1905)  was  found  to  ])e  the  bigliest  Actual  Figure 
in  January  during  the  same  time,  and  was  therefore  placed 
at  the  high  end  of  the  Scale  Ta])]e.  Tlie  difference  between 
the  two  Actual  Figures  was  37,900,  which  was  divided  by 

B.VII— 23 


354  ROGER  W.  BABSON 

10,  aiul  tho  result,  3,790,  added  to  18,300  to  make  the  second 
fif^ure,  22,090,  added  again  to  tliat  for  the  next,  25,880,  and 
so  on  in  arithmetir^al  ]^rogrcssion  np  to  56,200,  the  liighest 
Actual  Figure. 

In  February,  the  lowest  Actual  Figui-e  was  approxi- 
mately 23,400,  in  190S:  tlie  highest,  68,700,  in  1906.  The 
difference,  45,300,  divided  l)y  10,  equals  4,530,  which,  added 
to  23,400,  gives  27,930,  and  successively,  the  other  figures 
opposite  February.  Working  out  each  month  in  the  same 
manner,  we  have  as  a  result  a  ta))le  which  gives  a  scale  for 
each  month  in  which  the  left  and  light  ends  are  Actiial 
Figures,  and  the  figures  between,  proportional  or  mathe- 
matically graded  figiires.  These  are  what  we  mean  by  Scale 
Figures. 

Placing  the  Index  Fir/ures  over  fJie  Scale  Fifjures.— 
We  then  arrange  the  Scale  Figures  in  columns,  ]ilacing  zero 
over  the  the  column  whose  average  approximates  most 
closely  to  the  average  conditions  of  the  years  1903  and 
1904,  that  is,  the  depression  following  the  1903  panic.  This 
date  is  taken  arbitrarily  as  the  starting  j^oint  of  the  Ba- 
rometer. We  then  place  the  other  Index  Figures  in  series 
to  the  left  and  light  of  zero. 

E.rfension  of  Scales. — If  llu'  volume  of  Ijusiness  in- 
creases, so  as  to  go  beyond  the  scales,  higher  scale  figures 
are  added,  using  the  same  arithmetical  progression  as  at 
first,  so  that  the  actual  condition  of  the  years  1898-1908 
senTS  as  a  constant  by  which  to  compare  succeeding  years. 
Scales  similar  to  this  one  on  Immigration  have  lieen  pre- 
pared for  all  the  subjects,  and  with  these  in  hand,  we  are 
prepared  to  combine  our  figures  and  prepare  a  Composite 
Plot. 

The  next  step  is  to  segregate  the  different  subjects  into 
tlu'ce  groups:  ^Icrf-antile  Conditions;  ^ronetary  Condi- 
tions: and  TnvestuKMit  Conditions.  The  manner  of  arriv- 
ing at  tlie  Indox  Figure  for  each  subject  is  discussed  on 
the  following  pages. 


FORECASTING  TRADE  CONDITIONS         355 

Mercantile  Conditions. 

1.  Immigration. 

2.  New  Building. 

3.  Failures. 

4.  Bank  Clearings. 

Monetary  Conditions, 

1.  Commodity  Prices. 

2.  Surplus  Reserves. 

3.  Foreign  Money  Rates. 

4.  Domestic  Money  Rates. 

Investment  Conditions. 

1.  Condition  of  Leading  Crops. 

2.  Railroad  Earnings. 

3.  Political  Factors. 

4.  Stock  Market  Conditions. 

The  Mercantile  Group. 

1.  Ln migration  -f  4i.— We  will  first  obtain  an  Index 
Figure  for  Immigration.  The  Actual  Figure  for  January, 
1910,  was  50,243.  Consulting  our  Scale  Figures  for  Jan- 
uary, we  find  that  50,243  is  near  the  high  end  of  the  scale, 
between  48,620  and  52,410;  so  the  Index  Figure  will  be  be- 
tween +  40  and  +  50.    Or.  in  dotnil: 

(1)  50,243—48,620  =  1,623,  or  the  difference  between 
the  Actual  Figure  and  the  next  lower  Scale  Figure. 

(2)  yw)  X  10=  -^^=4  (number  of  points  to  be  ad- 
ded to  obtain  exact  Index  Figure). 

(3)  4  added  to  -f  40  =  -f  44,  as  an  index  of  unskilled 
labor  conditions  leased  upon  government  figures.  This  gives 
an  Index  Figure  of  +  44  for  Immigration. 

2,  Xew  Building  +  73. — We  next  will  take  New  Build- 
ing, for  which  we  have  an  Actual  Figure  of  $33,443,030, 
which  comes  between  33,370,000  (+  70)  and  35,900,000 
(H-  80). 


366  ROGER  W.  BABSON 

(n  :^:^,443,000— 33,370,000  =  73,000. 

^_.       73.000     ,,.730^000_ 

^^^    251.000-"^  ^^^~251,000~'^- 

(3)  3  added  to  +  70  ^  +  73,  as  an  index  of  construc- 
tion work  l)aPod  upon  i^ermit  figures  compiled  from  the 
Construction  News.  This  gives  an  Index  Figure  of  -\-  73 
for  New  Building. 

3.  Failures  O.  — During  January,  1910,  tlicre  were  some 
very  large  failures,  which  dropped  the  figure  to  zero,  thus 
giving  vs  an  Index  Figure  of  0  for  Failures.  (Owing  to 
the  unusually  heavy  liabilities  of  these  few  failures,  the 
Scale  Figures  would  have  placed  the  Index  at  about— ISO, 
a  fiinire  not  iustified  bv  the  fundamental  conditions  in  this 
field.)  This  figure  serves  as  a  very  good  index  of  the  retail 
trade,  based  upon  Dun's  and  Bradsti-eet's  Reports. 

4.  Bank  Clearings  +  102.— lu  the  case  of  Bank  Clear- 
ings, a  weekly  Index  is  always  used,  because  in  the  Weekly 
Barometer  Letter  we  use  the  report  for  the  preceding  week. 
The  Actual  Figures  of  each  month  are  divided  by  the  num- 
ber of  calendar  days  in  that  month,  and  the  quotient  mul- 
tiplied by  7.  The  result  is  a  set  of  Scale  Figures  comparing 
with  the  weekly  reports.  When  the  monthly  figure  is  used, 
it  is  divided  by  the  number  of  calendar  days  and  the  quo- 
tient multi])liod  by  7.  Thus,  to  obtain  the  Index  Figure  for 
January,  1910,  the  Total  Bank  Clearings,  excluding  New 
York — $5,887,868,000,  were  reduced  to  a  weekly  average. 

$5,887,868,000-4-31  x  7  =  $1,329,714,000. 
Proceeding  as  before: 

(1)  1,329,000,000—1,324,000,000  (Index  +  100)  = 
$5,000,000. 

s^ooaooo   ^p._ioo_^ 

^^^    58,000,000 ''^^^~   SS""' 

(3)  2  added  to  -f  100  =  +  102,  as  an  index  of  general 
trade  conditions,  based  on  Clearings  as  compiled  by  the 
W.  B.  Dana  Co.  Tliis  gives  us  an  Index  Figure  of  -\-  102 
for  Bank  Clearings. 


FORECASTING  TRADE  CONDITIONS         367 

The  Monetary  Group. 

1.  Commodity  Prices  -\-  123.— In  the  case  of  Com- 
modity Prices,  we  use  Bradstreet's  Index  for  January  1, 
1910,  which  was  9.23.    Proceeding  as  before : 

(1)  9.23—9.20  (Index  +  120)  =0.03. 

03 

(2)  ^t-15=3. 

(3)  3  added  to  +  120  =  +  123,  as  an  index  of  domestic 
requirements  for  money  based  upon  Bradstreet's  Index. 
This  gives  us  an  Index  Figure  of  -\-  123  for  Commodity 
Prices. 

2.  Surplus  Reserves  -\-  66.— The  next  subject  we  come 
to  is  Surplus  Reserves,  and  in  this  case,  we  use  an  inverted 
scale.  Heavy  reserves  like  those  in  1904  and  1908  are  char- 
acteristic of  a  depression.  Reduction  of  reserves,  although 
not  favorable  in  the  long  run,  is,  for  the  purpose  of  the 
Index,  taken  to  mean  increased  business  and  increased  de- 
mand for  money.  Below  $5,000,000  this  subject  is  put  on 
what  we  call  the  deficit  scale,  declining  quickly  to  zero  as 
the  reserves  are  wiped  out,  and  reading  —  66  for  a  deficit  of 
$50,000,000,  as  in  November,  1907. 

Proceeding  as  usual  (but  with  inverted  scale)  we  find 
that  the  Januarv  average  Surplus  Reserves  equal  $22,708,- 
081. 

(1)  27,500,000  (Index  -f  60)— 22,708,081  =  4,800,000. 

(')    7.500.000^10  =  6. 

(3)  6  added  to  -f  60  =  +  66,  as  index  of  domestic  supply 
of  money  based  upon  official  bank  figures.  This  gives  us  an 
Index  Figure  of  -\-  66  for  Surplus  Reserves. 

3.  Foreign  Money  Rates  +  J.5.— For  indexing  both 
foreign  and  domestic  money  rates,  the  scales  are  similar. 
In  both  cases,  the  Index  Figure  advances  10  points  to  every 
gain  of  J  of  1  per  cent  in  the  actual  figures. 

In  January,  1910,  the  official  rates  of  the  Bank  of  Eng- 


358  ROGER  W.  BABSON 

land,  Bank  of  Franco  and  tlio  Tmpovial  Bank  of  Berlin 
avt'rau,ed  '.Y'r,  per  cent,  .i^ivin.u  an  index  i^^i^nire  of  —  ');'), 
which  serves  as  an  index  of  forei^^n  monetary  conditions 
based  n])()n  official  reports.  TJiis  (jivcs  an  Index  Figure  of 
-j-  55  for  Foreign  Money  Bates. 

4,  Domesfie  Money  Rates  -{-  5^.— The  averap^e  domestic 
bank  rate  for  Janiiary,  1910,  was  4.^  per  cent,  ^i^'i^i.?  ^  fi.unre 
of  +  50,  as  an  index  of  domestic  money  conditions  showing 
the  confidence  of  the  banking  comnninity.  This  gives  an 
Index  Figure  of  -\-  50  for  Domestic  Money  Rates. 

Note:  In  indexing  money  rates  above  6  per  cent  an 
average  occurring  only  in  a  period  of  financial  distui'liance, 
a  panic  scale  has  to  be  substituted  by  the  statistician  in 
charge,  according  to  conditions  shown  by  a  majority  of  the 
other  subjects.  On  this  panic  scale  the  Index  would  move 
to  —  60  I'apidly  when  rates  were  advancing  from  6  per  cent 
to  8  per  cent  or  above. 

The  Investment  Group. 

1.     Crops  +    70.— To   index  the  C(mdition   of   leading 
crops,  Corn  and  AVheat  are  added  together  and  the  result 
I'educed  to  an  index. 
Corn       (1909)       2,772,376,000  bushels 
AVhcat    (1909)  737,189,000  bushels 

Total  3,r)()9,r)6r),000  busliels 

(1)  3,509,r)(5r),000— 3,500,000,000  (Index  +  70)  =9,565,- 
000. 

9.565.000 

^"^     70.000.000  -^  '  ^  -"  '  • 

(3)  1  added  to  +  70  =  +  71. 

'^i'his  gives  an  Index  Figui-e  of  -j-  71  for  the  crop  situa- 
tion. During  the  winter,  the  crop  figure  remains  stationary, 
but  changes  according  to  senile  as  soon  as  the  first  estimates 
of  the  new  ci*op  are  reeeivcHl.  'j'his  is  the  great  agricultural 
index    of    our    nation,    based    u])on    government    reports. 


FORECASTING  TRADE  CONDITIONS  359 

Therefore,  for  Jmmanj,  1910,  ire  use  an  Index  Figure  of 
-f-  71  for  Crops. 

2.  Railroad  Earnings  +  <5^.  — For  studying  railroad 
traffic,  Ave  use  Idle  Car  Figures  as  issued  from  week  to  week, 
and  the  Index  is  later  revised  by  the  statistics  for  the  gross 
earnings  of  10  railroads.  January  gross  earnings  were 
$55,828,736. 

(1)  55,828,000—55,488,000  (Index  +  80)  =  340,000. 
_340,000 

^^^     1,894.000^  lu— z. 

(3)  2  added  to  +  80  =  +  82  as  an  index  of  investment 
earnings  based  upon  official  figures  of  our  own  compilation. 
This  gives  ns  an  Index  Figure  of  -\-  82  for  Bailroad  Earn- 
ings. 

3.  Political  Factors  +  7^.— This  factor  has  been  added 
by  request,  but  is  used  with  an  arbitrary  Index  Figure,  no 
Scale  or  Actual  Figures  being  obtainable.  The  Index  for 
Political  Factors  stands  at  +  70  for  ordinary  conditions, 
and  is  modified  according  to  the  opinion  of  the  office  as  to 
the  relative  importance  of  ordinary  current  events.  This 
gives  us  an  Index  Figure  of  +  70  for  Politic(d  Factors. 

4.  Stock  Market  Conditions  +  65.— The  average  of  the 
high  and  low  points  in  January  for  the  20  Kailroads  = 
125.40. 

(1)     125.40—125.00  (Index  +60)  =  .40 

(2)  t;5;x5  =  2. 

(3)  2  +  60  =  +  62. 

The  average  of  the  high  and  low  points  of  12  Industrials 
in  January  was  94.50. 

(1)  94.'50— 93.75  (Index  +  55)  =  .75. 

(2)  y^x5=3. 

(3)  3  +  55  =  +  58. 

Averaging  62  and  58,  gives  as  an  Index  Figure  for  the  whole 


360  ROGER  W.  BABSON 

group  of  stocks,  +  60,  provided  no  weight  is  given  to  the 
number  of  shares  traded  in,  which  for  January,  1910,  was 
24,538,049,  or  an  average  of  5,540,000  per  week.  Wlien  the 
average  figure  for  the  stocks  in  a  "bull"  market  is  between 
-j-  60  and  +  80,  we  add  5  for  every  million  in  excess  of 
5,000,000  shares  traded  in,  per  week,  or  subtract  5  for  every 
million  under  tliat  figure.  In  this  instance,  we  add  5,  mak- 
ing the  Stock  ^larket  Index  +  65,  based  upon  actual  quota- 
tions of  our  own  compilation.  TJiis  gives  us  an  Index 
Figure  of  +  65  for  Stock  Marlxef  Conditions. 

Summary  Figures. 

Mercantile  -f  6'4.— The  result  of  the  preceding  is  that 
for  the  Mercantile  Group  we  have : 

1.  Immigration +     44 

2.  New  Building  +     73 

3.  Failures 0 

4.  Bank  Clearings,  -f  102,  which  in  order  to  give 

double  weight,  we  consider -f  204 

This  makes  a  total  of +321 

Divided  by  5,  gives  a  Summary  Index 

Figure  for  Mercantile  Conditions  of  +     64 
Monetary  -\-  69.— Id.  the  same  way,  we  have  Index  Fig- 
ures for  the  Monetary  Group  as  follows: 

1.  Commodity  Prices   -f  123 

2.  Sur]ilus  Beserves   +     66 

3.  Foreign  Money  Rates +     55 

4.  Domestic  ^loney  Rates,  -f  50,  to  which  we  also 

give  double  weight,  calling  it -\-  100 

This  makes  a  total  of  ^ -f-  344 

Divided    by   5,   gives   a   Summary    Index 

Figure  for  Monetary  Conditions  of.  .      +  69 
Investment  -\-  7:^.— In  the  same  way  we  add  together  the 
Index  Figures  on  Investment  Conditions,  viz. : 

1 .  Crops -f  71 

2.  Railroad  Earnings  +  82 


FORECASTING  TRADE  CONDITIONS         361 

3.  Political  Factors -\-     70 

4.  Stock    ^lai'ket   Conditions,    -f  6d,   which   we 

double,  and  consider +  130 

This  makes  a  total  of +  353 

Divided  by  5,  gives  a  Summary  Index 

Figiire  for  Investment  Conditions  of     +     71 

Final  Siimmari/.—The  final  step  is  to  add  these  three 
independent  Summary  Figures,  viz:  +64  +  69  +71  = 
+  204,  and  to  divide  by  3,  which  gives  us  a  Final  Summary 
Index  Figure  of  +  68.  litis  is  the  figure  appearing  on  the 
Composite  Plot. 

In  all  these  processes,  the  Index  Figure  is  obtained  from 
the  Actual  Figure  in  one  way.  The  Scales  and  Indexes  are 
all  made  up  on  the  same  principle;  the  only  differences  are 
those  which  have  been  needed  for  small  adjustments  as  de- 
scribed under  Money  Rates,  Surplus  Reserves,  and  Share 
Transactions.  The  only  feature  wherein  the  personal  equa- 
tion enters,  is  in  the  weighting  or  the  doubling  of  the  Index 
Figures  on  Bank  Clearings,  under  the  Mercantile  Group, 
of  Domestic  Money  Bates,  under  the  Monetary  Group,  and 
of  Stock  Market  Conditions,  under  the  Investment  Group. 
This  results  in  giving  us  13^/3  per  cent  to  these  three  sub- 
jects, and  67:5  per  cent  to  each  of  the  other  nine,  which  makes 
a  total  of  100  per  cent. 

So  much  for  the  theory  and  the  mechanical  end  of  the 
work.    Now  a  word  as  to  its  a])i)lication. 

Why  Manufacturers  and  Merchants  Should  Study  the 

Composite  Plot. 

1.     The  Composite  Plot  aids  the  Credit  Department. 

The  most  successful  manufacturers  and  merchants  have 
found  that  the  system  of  '^ fixed"  credit  limits  for  cus- 
tomers is  absolutely  wrong  in  principle,  unjust  to  cus- 
tomers, unfair  to  the  sales  force  and  a  source  of  danger  to 
the  firm. 

Instead,  they  use  a  system  of  "flexible"  credit  limits  by 


362 


ROGER  W.  BABSON 


Scale  Table  on  Immigratioii. 


< 

u 

C/3 

X 

a 

Q 

z 

I— ( 

< 
o 

H 

Q 
W 

u 

ID 

Q 

w 

O 

H 

< 

O 

t— I 
o 

w 
o 

t— I 

< 

H 
O 
< 

O 

I— t 

O 

X 

t/3 
< 


+ 


T 


ooocoooooccc 
ooco3ococcc5 
rj  I-  —  -r  ~  o  "-I  x;  t-  «^  t":  o^ 

•j"  X*  ci"  o"  -f  -r  t~   00  x'  — "  t-  o" 


OOOOOOOOOOO 
-H  t^ J>  SI   -J"  Ci  »'5  O  »0  i.'^  »c 

-»<  i-"  f  f 


3  0   »'5   O  »0 
•O   "   t-  ^ 


rf  "i^  oo  rT  o  o  c'  •-'"  ci  -t  ~r  o" 

OONCOt--rOOiCiOOOO 


O^OOOOQOOO&O 
■M-rX3Ca0XOOOCCO 
-.i  O  I-  O  -H   —  CJ  O  'C  -»•  o  o_ 

x"  C4  r-"  oo  ■■'5  t-^  crT  -r  «o  t-"  <-<"  o 
o  — I  rj  o  w  00  00  X  o  o  t- 


p 

JZ 

rt  > 

!^  = 

^  O 

o  ■" 
E  ^ 

3   0* 

E-5 

•E-o 


o 

o 

o 

o 

OOOOOOOO 

n 

w—t 

fj 

t^ 

N 

r- 

o 

o 

»rt 

iO 

tt 

o 

X 

r-t 

\S 

t~ 

OJ 

o 

o 

M 

to 

^* 

-r 

o 

r- 

1- 

O 

M 

to 

t- 

■•^ 

o 

-»^ 

»-^ 

•<»> 

o 

o 

1— ( 

r-1 
1— < 

i~ 

I- 

00 

o 

c» 

I- 

O 

o 

O 

o 

O 

o 

c 

_ 

^ 

o 

c 

o 

f 

X 

o 

to 

•o 

o 

c 

o 

o 

c 

o 

o 

in 

•»• 

t^ 

■* 

n 

c*: 

-r 

o 

r^ 

t- 

n 

1-^ 

O 

o 

to 

o 

8 

Ci 

o 

-r 

;v^ 

o 

o 

■* 

irt 

o> 

o 

?J 

o 

t~ 

t- 

X 

X 

to 

1—t 

t-H 

f-H 

oooooocoocoo 

O  O  O  >n  O  »f3   O  C   1.0  '•■^  '■'5  O 

C^_  0_  00  X_^  to  C5  C^  M  "J"  oi  r-_  o 

t-  o  1.0  i.T  o"  to"  c}  M  oo'  to  r-'  '—" 

M-^XwlT-lOOtOtOOt-t-tO 


o 

o 

o 

o 

^ 

o 

o 

o 

o  c 

o 

o 

to 

CI 

■* 

-f 

-r 

-T 

o 

o 

c 

c 

o 

o 

o 

t 

o 

»— • 

* 

t- 

Lt 

-r 

CI 

-r 

CM 

X 

t- 

^ 

^^ 

lO 

f 

>n 

ro 

»o 

o 

CM 

o 

^ 

to 

en 

"I" 

1- 

X 

o 

t^ 

ifS 

»n 

to 

to 

to 

o 

o 

o 

o  o 

o 

o 

o 

o 

o  o 

o 

o 

o 

r~ 

CJ 

X 

n 

X 

M 

o 

c 

o 

m 

•n 

o 

1-H 

to 

o 

-»• 

o 

00 

1— ( 

f 

rt 

r-" 

X 

o 

1 

n 

•^ 

-»■ 

-!• 

o 

o 

X 

o 

to 

CM 

^^ 

1-1 

oj 

M 

to 

r- 

00 

to 

-!• 

■* 

o 

to 

o 

o 

O 

o 

o 

o 

o 

Q 

g 

o 

o 

8 

o 

o 

X 

to 

?1 

cj 

OJ 

M 

o 

c 

o 

o 

rl 

X 

-r 

GO 

r-H 

o 

t- 

».o 

^ 

o 

T-« 

1 

kO 

CQ 

M 

CO 

to 

to 

^H 

w 

o 

Irt 

CO 

t~ 

1 

(M 

ro 

o 

to 

to 

■>»• 

■«»• 

-J" 

»rt 

>o 

«o 

•* 

O  O  O  O  Q  O 
c;  M  to  -H  to  ,-1  lo  O  '."^  »o  o  o 
o_  o  "  CM  —^  r^  o  cj  CM  o  c:  .~: 
c>)  r-  .->t  CM  '->  «  "J"  i«  »i>^  oo"  >rt  ci 
CMCM->r«o«rtrococ«3'r"*'"r'^ 


'OOOOOOOOOOO 

—'OCOCOOOOCOO 
ro  -r  lo  f;_  M  cs_  to  X  CM  c  O  o 
ooneM>-itoo>t-^r>^odt-»x"r-r 
'^CMco'^Mi-ie'iwrO'j'Mco 

* 


u  rt  _ 


33   = 


E^  £"£ 


<-   ^ 


3    i,    O    O    (U 


c 


c  jr 


C9 

♦-< 
c 
o 

tJ 

c 
E 

3 


m   c 


^-^ 


3 

c« 

C 

v 

U 

4-* 

3 

f\ 

bo 

u 

u= 

bO 

u 

,.^ 

rt 

rt 

3 

v 

«J  J= 

< 

4^ 

c 

•  . 

R 

. 

<fl 

3 

m 

\i 

rt 

n 

u 

tj 

s, 

u 

T3^=: 

fS 

r 

rt 

u 

O 

^ 

u 

♦-* 

vn 

c 

-C 

E 

u 

3 

V 

c 

Z^. 

w 

0* 

* 

o 

u 

* 

4^ 

X 

w 

u 

^ 

FORECASTINa  TRADE  CONDITIONS         363 

which  credits  are  increased  and  decreased  in  accordance 
with  the  rehition  between  present  and  normal  business  and 
monetary  conditions,  i,  T/iJ*5  system  Invuriahly  results  in 
greatly  increased  sales  and  yet  insures  that  a  firm  sliall  be, 
in  a  strong  financial  position  at  a  time  of  panic  or  business 
crisis.  A  study  of  failures  shows  that  the  majority  are  duo 
to  unwieldv  "notes  parable." 

The  Composite  Plot  enables  firms  to  keep  accurately 
informed  as  to  present  and  future  trade  conditions  and  to 
know  whether  to  buy  more  merchandise  or  not,  whether  to 
exj^and  or  to  contract,  whether  to  branch  out  or  go  slowly. 
No  large  sums  of  money  are  made  today  by  simply  buy- 
ing and  selling  in  the  same  market.  The  most  successful 
wool  merchants,  the  most  successful  steel  contractors  and 
the  wealthiest  lumber  dealers  are  those  who  study  trade 
conditions  and  buy  when  every  one  else  is  down  and  out 
and  liquidate  w^hen  all  their  competitors  are  optimistic  and 
expecting  more  business.  How  did  J.  P.  Morgan's  father 
make  his  money  in  the  dry  goods  business?  IIow  did  Car- 
negie make  his  monov  in  the  steel  business  ?  How  did  Mar- 
shall  Field  make  his?  These  men  studied  fundamental  con- 
ditions and  bought  or  sold,  contracted  or  expanded,  in  ac- 
cordance with  what  these  black  areas  show. 

3.  But,  granting  that  your  credit  svstem  is  satisfactory 
— and  it  isn't  unless  you  use  flexi])le  credits — and  granting 
that  vou  now  usually  buy  at  the  lowest  and  sell  at  the 
highest,  you  still  need  to  watch  this  Composite  Plot. 

4.  Why?  Because  it  is  easier  to  sail  with  the  wind 
than  always  against  it.  AVhateyer  your  policy,  whatever 
your  line  of  business,  you  employ  capital,  you  own  or  I'ent 
a  building  and  usually  have  employes,  and,  in  every  move 
vou  make  from  the  time  vou  enter  vour  office  in  the  morn- 
ing  until  you  leave  at  night,  you  should  have  in  your  mind 
a  definite  idea  as  to  whether  we  are  having  a  period  of  pros- 
perity or  a  period  of  decline  and  about  when  the  change 
may  be  expected. 


364  ROGER  W.  BABSON 

And  now  a  word  regarding  the  general  investment  of 
money. 

The  Composite  Plot  Shows  When  to  Buy  and  When  to  Sell 

Securities. 

The  idea  that  one  should  invest  money  as  soon  as  it  ac- 
cunudates,  is  absolutelv  wronir.  The  most  successful  in- 
vestors  are  those  who  confine  their  purchases  to  hip^h-u^rade 
securities  and  devote  their  attention  to  dctenninini;-  when 
to  buy,  when  to  sell  and  when  to  remain  out  of  the  market. 
Conditions  are  always  suitable  for  one  of  these  three 
courses,  and  the  Composite  Plot  always  shows  which  of  the 
three  courses  one  should  pursue.  ]Moreover,  by  a  study 
of  this  plot,  it  is  possible  to  determine,  with  absohite  ac- 
curacy, the  present  condition  of  the  country  and  the  exact 
relation  between  said  present  conditions  and  what  would 
be  normal  conditions.  This  relation  shows  whether  hii2:her 
or  lower  security  prices  may  be  expected.  Of  course,  no 
plots  are  of  any  use  for  forecasting  daily  or  weekly  move- 
ments ;  but,  when  correctly  interpreted,  this  Comjiosite  Plot 
unfailin<::lv  shows  the  trend  of  trade,  monev  rates  and  in- 
vestment  prices. 

For  years,  fundamental  statistics  have  been  accumu- 
lated, aualvzed  and  studied  bv  the  most  successful  invest- 
ors.  Bv  use  of  the  Area  Theorv,  niv  book,  "Business 
Barometers,"  shows  how  $2,500  invested,  about  f(U-ty-tive 
years  ago,  in  the  most  conservative  stocks  of  that  day,  such 
as  Lackawanna,  Illinois  Central,  New  York  Central,  etc., 
(which,  moreover,  were  then  selling  almost  as  hi<j:h  as  in 
1907),  would  now  amount  to  over  $1,800,000  if  said  stocks 
had  been  bought  and  sold  in  accordance  with  what  funda- 
mental statistics  have  clearlv  sho^^Tl.  Said  investor  could 
have  confined  his  investments  strictlv  to  those  ten  hic:h- 
grade  securities— without  borrowing  or  buying  on  margin 
—and  moreover  would  have  boui]:ht  and  sold  onlv  eisfht 
times,  making  a  total  of  only  sixteen  transactions  with  an 


FORECASTINa  TRADE  CONDITIONS         365 

average  of  about  three  years  aj^art.  If  this  illustration  were 
based  on  highest  and  lowest  prices,  or  if  intermediate  move- 
ments were  considered,  or  if  less  conservative  stocks  were 
purchased,  the  result  might  be  made  much  larger.  Our 
illustration  eliminates  risk,  chance  and  extraordinary  con- 
ditions and  shows  only  what  any  person  with  $2,500  can 
safely  accumulate  in  a  comparatively  few  years,  by  simply 
following  the  system  of  waiting  until  the  early  part  of  an 
area  below  the  line  of  growth  has  been  formed  and  then  buy- 
ing outright  high-grade  dividend-paying  stocks,  holding 
these  stocks  until  this  area  has  been  wholly  completed  and 
a  prosperitj^  area  above  the  line  has  got  well  underway — say 
J  consumed— when  these  stocks  should  be  sold.  The  money 
should  then  be  kept  in  trust  companies  on  deposit  or  in- 
vested in  short-term  notes  or  commercial  paper  until  this 
prosperity  area  is  completed  and  an  area  below  the  line  of 
growi:h  has  been  started,  when  the  same  stocks  may  be  pur- 
chased again. 

To  forecast  trade  conditions,  four  steps  are  necessary: 

1.  Accumulating  each  week  the  data  on  these  various 
sul)jects  and  reducing  each  set  of  figures  to  common  denomi- 
nators. 

2.  Combining  each  week  all  of  these  common  denomi- 
nators into  one  figure,  using  the  same  to  extend  this  Com- 
posite Plot. 

3.  Interpreting  this  plot  based  on  the  *'law  of  action 
and  reaction"  to  determine  in  what  period  we  now  are  and 
what  will  be  the  next  period. 

4.  "Watching  this  chart  each  week  to  study  the  ''rate  of 
flow"  and  to  determine  when  the  next  period  will  be  at  an 
end. 

Practical  Uses  of  the  Work. 

As  stated,  this  Composite  Plot  shows  us  to  be  now  on 
the  ebb  tide  and  that  we  are  facing  a  period  of  readjust- 
ment; but  as  to  when  this  readjustment  is  coming  and 


366  ROGER  W.  BABSON 

wlu'tlicr  it  will  conic  in  the  form  of  a  panic  or  a  dull  period 
of  d('})rcssion  can  onl}^  be  based  on  the  present  "rate  of 
flow." 

I  have  endeavored  briefly  but  conscientiously  to  cover 
the  subject  assigned  nie.  1  have  endeavored  to  exi)lain  my 
work  in  an  honest,  frank  manner,  showinL:  you  its  weak- 
nesses, as  well  as  the  stren.i::th  thereof.  Althoudi  I  have 
emphasized  the  fact  that  the  Area  Theory  is  absitlutely 
sound,  1  have  taken  pains  to  mention  that  in  the  application 
of  the  theory  certain  assumptions  nnist  still  be  made.  How- 
ever, this  is  true  with  every  science,  and  even  the  great 
physician  or  surgeon  who  receives  a  fabulous  sum  for  an 
hour's  work  will  tell  you  that  probably  twenty  years  hence 
he  will  look  back  with  shame  upon  the  woi-k  he  is  doing 
today. 

Therefore,  although  the  science  is  by  no  means  per- 
fect, yet  I  wish  to  impress  upon  you  that  it  has  reached 
a  stage  where  it  demands  your  most  careful  attention. 
Therefore,  whether  or  not  you  agree  with  my  conclusions, 
I  beg  of  you  to  give  the  work  your  most  careful  and  con- 
scientious study  and  deduce  conclusions  for  yourself. 

The  future  of  this  nation  does  not  depend  on  its  battle- 
ships or  its  railroad  rates,  its  statesmen,  its  diphanats,  but 
rather  upon  the  integrity  and  strength  of  our  great  indus- 
tries, and  cspcciaJIj/  upon  you  business  men  and  ymmg  men 
who  are  a  distinct  factor  in  the  operation  of  these  indus- 
tries. Our  nation  is  just  like  a  big  rough  boy,  needing  to  be 
curbed  during  its  prosperity,  needing  to  be  encouraged  and 
cheered  up  during  its  depression,  and,  as  T  have  preached 
from  the  Atlantic  to  the  Pacific,  f(»r  each  additional  one 
of  you  who  l)egins  to  study  this  woi-k,  the  coming  ]ieriod 
of  de])ression  will  be  so  nuich  less  severe  and  the  nation's 
industries  will  permanently  be  on  a  sounder  and  stronger 
basis. 

So  nuich  for  the  theory  and  the  mechanical  end  of  the 
work ;  now  a  word  as  to  its  apijlication. 


FORECASTING  TRADE  CONDITIONS         367 

Why  Successful  Bankers  Should  Watch  the  Composite 

Plot. 

Most  banks  expend  too  little  time  and  money  studying 
fundamental  statistics  and  in  forecasting  future  money  con- 
ditions. 

With  a  general  foreknowledge  of  the  tendency  of  rates, 
a  bank  may  so  arrange  its  maturities  as  to  obtain  at  least 
one-half  of  one  per  cent  more  on  outstanding  loans  than  is 
possible  ^Yithout  such  knowledge.  It  may  be  necessary  to 
allow  a  customer  to  choose  either  the  "rate"  or  the  "matur- 
ity"; but  l)anks  should  insist  upon  their  right  to  fix  the 
other  factor,  and,  doing  so,  should  have  in  mind  the  tendency 
of  the  money  market.  If  the  tendency  is  uj^ward  and  the 
borrower  desires  to  pay  only  the  market  rate,  the  bank 
should  insist  on  a  short  loan;  Avhile  if  the  borrower 
desires  a  long-time  loan,  the  bank  should  insist  on  a  rate 
a})()ve  current  market  pi'ices.  The  reverse  is  true  if  the  ten- 
dency of  money  is  downward.  (See  money  line  on  Com- 
posite Plot.) 

To  buy  bonds  when  money  is  cheap,  in  order  to  obtain  a 
higher  income  than  can  be  obtained  on  notice,  is  a  very 
dangerous  practice,  as  banks  then  purchase  bonds  after  the 
price  has  advanced  and  are  often  compelled  to  sell  them  at 
a  loss  during  the  next  money  stringency  or  else  refuse  ac- 
commodation to  customers.  By  studying  this  Composite 
Plot,  however,  a  bank  may  safely  purchase  high-grade  secu- 
rities with  the  expectation  of  later  selling  them  at  a  profit, 
because  such  banks  know  when  the  time  for  selling  said 
securities  is  at  hand.  The  most  conservative  banks  pur- 
chase for  permanent  investment  only  government  and  such 
bonds  as  can  be  counted  as  "Reserve,"  and  purehase  gen- 
eral corporation  bonds  onhj  for  the  purpose  of  selling  again 
at  a  profit  in  the  course  of  a  short  time.  In  other  words, 
they  buy  bonds  preceding  a  period  of  cheap  money  when 
bonds  are  always  low,  and  sell  them  before  money  again 
becomes  high. 


368  ROGER  W.  BABSON 

Such  banks  not  only  receive  an  income  of  about  4  per 
cent  upon  such  securities  and  a  profit  of  from  10  per  cent 
to  20  ])er  cent  when  they  sell,  but  also  are  always  in  the 
strongest  possible  condition  with  very  large  reserves  at 
the  time  of  a  crash  or  monev  strinG:encv.  Therefore,  the 
study  of  fundamental  statistics  and  especially  this  Com- 
posite Plot,  not  only  enables  banks  to  receive  greater  income 
from  their  loans  and  larger  profits  from  the  purchase  and 
sale  of  securities,  but  insures  that  such  banks  buy  only  the 
highest  grade  of  securities  and,  moreover,  sell  them  before 
the  money  is  needed  for  customers. 

Why  Bond  Dealers  and  Stock  Brokers  Should  Watch  This 

Composite  Plot. 

During  twelve  years  given  exclusively  to  work  for  the 
largest  bond  and  stock  exchange  firms,  I  have  found  that 
some  firms  are  always  prepared  for  every  change  in  mone- 
tary and  investment  conditions  and  universally  profit  there- 
by, while  others  are  often  unprepared  and  either  sustain 
losses  or  are  handicapped  by  heavy  commitments.  More- 
over, in  nearly  every  ease,  I  found  that  these  most  suceessful 
firms  fjave  mucli  study  to  fundamcutal  statistics  and  based 
their  business  policy  in  accordance  irith  what  such  statistics 
foretold.  Firms  who  have  watched  these  figures  during  the 
past  years  have  always  been  prepared  for  every  period  of 
high  prices  by  having  previously  purchased  large  auKnnits 
of  long-term  bonds  at  low  prices.  As  money  rates  have  in- 
creased, such  firms  and  their  customers  have  gradually  re- 
duced their  loans  and  changed  securities.  By  such  a  pc^licy 
they  are  always  able  to  trade  at  the  market  and  still  make 
a  ])rofit.  When  these  figures  have  foretold  a  coming  jieriod 
of  money  stringency,  such  firms  have  purchased  and  recom- 
mended only  short-term  notes*  and  bonds  maturing  within 


*Matiy  do  not  become  interested  in  short-time  notes  until  money  rates 
are  high  and  when  investors  should  be  buying  long-term  b<ind<.  Of  course 
this  is  the  time  for  corporations  to  become  interested  therein,  but  not  bond 
dealers,  who  should  purchase  and  recommend  short-time  notes  before  money 
rates  are  high  and  when  bonds  are  selling  at  top  prices. 


FORECASTING  TRADE  CONDITIONS         369 

one  or  hvo  years,  which  insured  that  they  and  their  cus- 
tomers would  at  critical  times  have  large  cash  balances  in 
order  to  take  advantage  of  the  next  period  of  low  prices. 
Such  firms  not  only  make  great  profits,  while  at  the  same 
time  keeping  themselves  in  an  imj^i'egnably  strong  financial 
condition,  but  create  a  most  loyal  and  valuable  clientele. 
Therefore,  all  bond  dealers  and  brokers  should  constantly 
watch  this  Composite  Plot  to  forecast  trade  conditions. 


B.VII— 24 


WALL  STREET  PHRASES  AND  METHODS. 

BY  JOHN  MOODY. 

[Author    of    "The    Truth    About    the    Trusts";    Editor    of   "Moody's    Manual 
of  Railroad  and  Corporation  Securities,"  etc.] 

In  the  Wall  Street  field  many  teiTiis  and  phrases  are 
used  whieh  are  not  familiar  to  the  outsider  and  therefore 
require  dctiuitinn  in  a  book  of  this  kind.  In  faet,  many 
praetieal  Wall  Street  people,  while  elearly  understanding 
the  meaning  of  such  and  such  a  phrase  or  word,  cannot  al- 
ways concisely  define  it,  or  convey  its  exact  meaning  to 
the  inquirer.  In  the  following  pages  the  chief  terms  and 
phrases  relating  to  the  modes  and  general  mechanism  of 
the  Street  are  briefly  defined  and  explained.  The  various 
words  or  phrases  are  taken  up  in  alphabetical  order. 

Arbitrage.  The  buying  and  selling  of  the  same  secu- 
ritv  in  different  markets,  as  New  York  and  London,  or 
New  York  and  Chicago,  for  the  purpose  of  making  a  i)rofit 
from  the  difference  in  quotation  between  the  two  markets. 
This  trading  is  of  course  based  on  temporary  differences  in 
prices  between  the  markets,  which  are  due  from  some 
special  cause.  If  all  things  were  equal  every  stock  would, 
of  course,  have  the  same  value  in  every  market  in  which 
it  is  dealt  in.  There  are  two  kinds  of  arbitrage  dealings 
in  stocks  between  New  York  and  London.  One  operation 
is  known  as  the  ''spread"  and  the  other  the  "back-spread." 

Averaging.  This  is  a  speculative  term  which  is  used 
to  describe  purchases  or  sales  of  stock  which  are  made 
when  the  market  is  rising  or  falling,  as  the  case  may  be,  for 
the  purpose  of  improving  the  position  of  the  buyer  or  seller 
ill  the  matter  of  his  average  price  for  all  his  securities. 
For  instance,  if  100  shares  are  ])urchased  at  95  and  tlie 
price  declines  to  75,  the  averager  will  purchase  another 


370 


WALL  STREET  PHRASES  AND  METHODS    371 

hundred  shares  at  75,  thus  bringing  the  average  cost  of 
his  total  hoklings  to  85.  Hence,  as  soon  as  the  i^rice  of  the 
stock  recovers  to  over  85  he  will  have  a  profit  on  his  entire 
transactions. 

Bear.  This  is  the  name  for  a  speculator  who  sells  stock 
short  in  expectation  of  buying  it  back  at  a  lower  price.  In 
order  to  do  this  he  of  course  borrows  a  certificate  to  de- 
liver against  his  sale,  and  when  he  has  bought  in  or 
"covered"  he  uses  the  new  bought  certificate  to  repay  the 
loaner. 

Bill  of  Exchange.  This  is  a  written  order  or  request 
from  one  person  to  another  for  payment  to  a  third  party, 
the  amount  paid  being  charged  to  the  one  who  issues  or 
signs  the  bill.  There  is  in  reality  no  difference  between 
a  "bill  of  exchange"  and  an  ordinary  draft,  but  the  former 
tenn  is  commonly  applied  to  an  order  for  money  payable 
in  a  foreign  countrv,  whereas  the  same  sort  of  order  ]X\v- 
able  witliin  the  country  of  its  origin  is  known  as  a  "draft." 

Blind  Pool.  A  ])lind  pool  in  the  stock  market  is  one 
where  the  members  join  together  and  C(mtri])ute  capital, 
agreeing  that  only  the  manager  shall  have  full  charge  of 
the  pool  and  know  in  what  way  the  m(niey  is  to  1)e  used. 
Blind  pools  are  not  confined  to  stocks  but  may  be  carried 
on  in  a  scheme  of  almost  anv  nature. 

Bobtail  Pool.  This  is  a  terai  which  usually  applies  to 
a  small  or  infonmal  pool  in  stocks.  In  such  cases  the 
members  join  together  to  move  the  stock  either  up  or  down 
and  then  each  is  usually  allowed  to  suit  liis  own  plens- 
uro  in  closinq-  out  his  interest  in  tlie  pool. 

Bucketing.  This  is  a  tenn  used  to  describe  sales  made 
by  a  broker  for  his  own  account  aiid  risk  against  cus- 
tomers' purchases  or  purchases  by  the  broker  against  cus- 
tomers' sales.  Tt  is  a  reprehensible  practice  and  is  usually 
done  to  enable  the  brokei*  to  speculate  against  his  cus- 
tomers' trades.  Tn  such  instances  the  broker  vnus  if  his 
customers  lose,  or  he  loses  if  his  customers  win. 


372  JOHN  MOODY 

Bucket-Shop.  This  is  a  place  usually  advertised  as  a 
brokerage  office  where  bets  are  made  on  regular  stock  ex- 
change quotations.  No  actual  transactions  take  place. 
Usually  money  is  put  up  by  the  customer  and  a  commis- 
sion is  charged  for  buying  and  selling  the  same  as  on  a 
regular  exchange.  When  the  quotations  show  a  ])rofit  to 
the  customer,  he  is  privileged  to  demand  his  prolit;  when 
the  limit  of  the  customer's  margin  has  been  reached  in  the 
price  of  the  stock,  the  customer  has  lost  his  bet  and  his 
money  and  is  "wiped  out." 

Call.  A  call  on  a  stock  is  a  contract  or  agreement  bind- 
ing the  issuer  to  deliver  to  the  holder  of  the  call  the  stock 
named  therein  within  a  certain  time,  at  a  certain  price, 
if  the  holder  shall  so  demand.  For  instance,  the  one  issu- 
ing a  call  will  agree  to  deliver  one  hmulred  shares  of  a 
specified  stock  within  thirty  days  at  110  if  the  purchaser 
makes  a  demand  for  it.  Should  the  stock  be  selling  at  106 
the  issuer  of  the  call  may  be  able  to  sell  his  promise  for 
$100.  The  purchaser  of  the  call  will  then  hold  the  same, 
and  if  the  stock  rises  above  111  within  the  thirty  days  lie 
will  ('.ill  upon  the  issuer  for  the  hundred  shares  at  110  and 
probably  sell  the  same  in  the  market  at  or  over  111,  thus 
realizing  a  profit.  A  contract  of  the  same  kind  applying  to 
the  short  side  of  the  market  is  known  as  a  "put." 

Corner.  A  corner  in  a  stock  is  caused  by  the  ]">urchase 
by  a  pool  or  other  interest  of  all  the  fl(\Tting  or  purchasable 
stock  of  the  company,  after  which  the  ]^rice  can  be  advanced 
at  the  will  of  those  creating  the  corner.  Sjieculators  who 
are  short  of  the  stock  and  are  imable  to  buy  or  borrow  to 
make  delivery  or  return  stock  which  thev  have  borrowed, 
are  thus  forced  into  a  corner  and  "squeezed."  They  must 
settle  with  the  buyers  at  the  buyers'  o^^^l  prices. 

Covering.  This  is  a  term  used  in  the  stock  market  to 
describe  the  act  of  buying  stocks  or  commodities  for  the 
puri:)ose  of  closing  short  contracts — buying  back  stocks 
pre^^ously  sold  but  which  were  not  possessed  when  sold. 


WALL  STREET  PHRASES  AND  METHODS    373 

Due  Bill.  In  stock  exchange  parlance  a  due  bill  is  a 
promise  to  pay  a  dividend  which  has  been  declared  but  has 
not  yet  been  paid  by  the  company.  For  instance,  a  stock 
certificate  may  be  purchased  in  the  market  after  the  trans- 
fer books  of  the  corporation  have  been  closed,  or  the  trans- 
fer of  the  stocks  may  not  have  been  made,  but  by  agree- 
ment the  dividend  is  to  go  to  the  purchaser,  and  not  to 
the  party  in  whose  name  the  certificate  stands.  When  the 
dividend  is  paid  to  the  original  party  the  due  bill  is  pre- 
sented to  him  and  he  passes  the  dividend  over  to  the  pur- 
chaser. 

Flat.  This  signifies  ''without  interest."  When  bonds 
are  sold  flat  no  charge  is  made  to  the  buyer  for  the  accrued 
interest,  as  the  interest  is  included  in  the  price  of  the  bond. 
On  the  New^  York  Stock  Exchange  all  bonds  are  sold  at 
''flat"  prices,  but  in  private  transactions  a  large  majority 
of  the  sales  are  made  on  an  "accrued  interest"  basis.  The 
term  "flat"  is  also  used  in  relation  to  the  lending  of  stocks. 
When  stocks  are  lent  flat  the  lender  does  not  pay  interest 
to  the  borrower  of  this  stock.  Otherwise  the  borrower  will 
pay  the  lender  the  market  value  of  the  stock  and  the  lender 
will  pay  interest  to  the  borrower  on  his  money. 

Giving  up.  This  term  is  used  in  the  stock  markets  to 
describe  a  broker  who  executes  an  order  for  another  broker 
and  whose  connection  with  the  transaction  then  ends.  In 
reporting  to  the  broker  to  whom  he  sells  or  from  whom 
he  buys  the  name  of  the  broker  for  whom  he  is  acting,  he 
is  said  to  "give  up"  the  latter.  The  latter  receives  the 
stock  and  completes  the  transaction. 

Hypothecation.  This  signifies  the  pledging  of  securities 
or  other  property  as  collateral  for  loans.  In  Wall  Street, 
where  stocks  are  purchased  on  margin  and  carried  by  a 
broker  for  his  customer,  they  are  usually  hj'pothecated, 
or  deposited  as  collateral  in  loans  with  banks  or  trust  com- 
panies or  other  loaners  of  monev.  In  this  wav  the  broker 
secures  the  capital  to  carry  the  stocks  for  his  customer. 


374  JOHN  MOODY 

Irish  Dividend.  This  is  a  term  sometimes  used  to  de- 
scribe not  a  dividend,  but  au  assessment  on  a  stock. 

Joint  Account.  Tlie  term  for  a  transaction  in  which  two 
or  more  brokers  or  speculators  join  together  \'nr  tlicir 
mutual  beuetit  or  risk  in  carrviui^  througli  a  transaction. 

Long  of  stocks.  This  is  the  phrase  used  when  a  specu- 
lator is  a  bull;  that  is  to  say  when  his  account  shows  a 
balance  of  stocks  on  the  loug  or  bull  side.  The  opposite 
condition  is  to  be  short  of  stocks  and  be  ou  the  bear  side. 

Manipulation.  This  word  a])pUes  to  the  operation  of 
working  stocks  both  up  and  d(»wn  on  the  exchanges,  both 
ways  at  once.  A  well-known  method  of  manii)ulating  a 
stock  is  to  i)ut  through  on  the  exchange  a  number  of  ticti- 
tious  sales,  one  broker  agreeing  to  purchase  at  a  certain 
price  from  another  and  the  latter  then  agreeing  to  rejun-- 
chase  the  same  stock  at  the  same  or  another  price.  This 
arrangement  is  sometimes  carried  on  between  various 
brokers,  each  transaction  being  offset  in  S(nne  wav  bv  an- 
other.  As  a  result  there  may  be  a  large  number  of  quota- 
tions reported  with  no  actual  sales.  These  quotations  are 
commonly  known  as  **wash"  transactions,  and  the  ])ur- 
pose  usually  is  to  create  outside  interest  in  the  stock  and 
start  a  s]i(*culatiou  in  it  among  genuine  buyers  and  sellers. 

Margin.  This  is  the  word  used  to  describe  money  de- 
posited with  a  broker  for  speculation  in  st(^eks,  grain  or 
other  eouniindities.  Tn  st(^cks  the  margin  re(|uired  ranges 
from  5  ]M>r  cent  to  fJO  per  cent,  de]^endent  u]^on  the  char- 
acter of  the  security  ]")urchased.  The  average  margin  is 
10  per  cent,  which  amounts  to  $1,000  (ni  the  (U'dinary  (Hie 
hundred  shares  of  stock.  The  margin  ]u*otects  the  cus- 
toTuer  down  to  a  ]")rice  ten  ]ioints  below  the  price  he  has 
paid,  if  he  is  Inug  of  stock,  and  leu  points  above  the  ]'>rice 
he  has  received  if  he  is  short  of  the  stock.  As  his  margin 
becomes  narrower  because  of  the  change  in  the  market 
prices  he  is  required  to  put  up  more  money  or  else  have  his 
accoimt  closed  out. 


WALL  STREET  PHRASES  AND  METHODS    375 

Outside  broker.  This  tonn  descri])cs  a  broker  who  is 
not  a  moinbcr  of  the  regiihir  exchaiicje,  l)iit  Avho  deals  in 
securities  either  on  the  streets  or  elsewhere.  In  New  York 
City  an  outside  broker  is  one  who  deals  in  what  is  kn(jwn 
as  the  outside  market  or  on  the  curl).  There  are  nowadays 
a  very  large  number  of  stocks  and  bonds  which  are  traded 
in  in  this  outside  market,  and  these  outside  brokers  usu- 
ally conduct  just  as  legitimate  a  business  as  those  who 
make  trades  on  the  stock  exchange. 

Passing  a  dividend.  This  does  not  mean  declaring  a 
dividend,  as  many  people  assume,  but  it  means  failure  to 
declare  a  dividend  that  had  previously  been  regularly  paid. 
"Wlien  the  company  specifically  states  that  it  will  not  pay  a 
similar  dividend  to  that  which  previouslj^  had  been  paid, 
then  it  is  said  that  the  dividend  is  stopped.  But  when  no 
official  action  is  taken  and  the  dividend  simply  is  not  de- 
clared by  the  directors,  it  is  said  to  have  been  ''passed." 

Privilege.  This  is  a  general  name  for  a  call,  a  put,  a 
spread  or  a  straddle,  infonnation  as  to  each  of  these  terms 
being  supplied  under  their  own  headings.  In  any  kind  of 
privilege  the  purchaser  of  the  same  is  not  liable  for  loss 
beyond  the  amount  actually  paid  for  it. 

Put.  A  put  on  a  stock  is  the  reverse  of  a  call,  ])oing  a 
written  contract  or  agreement  binding  the  issuer  to  receive 
from  the  holder  the  stock  named  in  tlio  agreement  within 
a  certain  time  at  a  certain  price  if  the  holder  shall  so  de- 
mand. The  act  of  delivering  such  stock  to  the  issuer  of 
the  contra  of  is  generally  kno^^^l  as  "putting"  the  stock. 

Pyramiding.  This  describes  operati(ms  by  the  use  of  pa- 
per profits  made  in  transactions  not  yet  closed  and,  therefore, 
not  yet  in  hand.  For  instance,  one  may  purchase  one  hun- 
dred shares  of  stock  at  50  on  a  margin  of  10  per  rent  of  the 
par  value.  If  the  stock  advances  to  60  the  purchaser  will 
then  have  20  per  cent  margin  and  he  will  purcliase  one 
hundred  shares  more.  If  the  price  then  goes  to  70  he  will 
purchase  two  hundred  shares  more,  giving  him  four  him- 


376  JOHN  MOODY 

dred  in  all.  If  it  next  goes  to  80  he  will  then  purchase  four 
hundred  shares  more,  giving  him  eight  hundred  shares  in 
all,  on  which  he  has  a  margin  of  10  per  cent,  or  $8,000.  Up 
to  this  point  his  paper  profits  will  be  $7,000.  If  the  market 
continues  in  its  rise,  he  will  continue  accumulating  stock 
until  his  account  shows  very  large  accumulated  paper 
profits.  If  he  then  sells  out  he  will  have  turned  his  profits 
into  cash,  hut  if  the  market  suddenly  drops  ten  points  he 
will  not  only  have  lost  the  profit  on  the  last  transaction,  but 
will  have  lost  everything.  In  other  words,  the  inverted 
pyramid  will  have  fallen  and  luiiied  him  in  the  crash. 

Spread.  A  spread  is  a  put  and  call  combined  and  is 
practically  the  same  as  a  straddle.  If  the  stock  goes  below 
the  price  named  in  the  put  end,  plus  the  cost  of  the  spread, 
the  holder  makes  a  profit;  also  if  the  stock  goes  above  the 
price  named  in  the  call  end,  plus  the  cost  of  the  spread, 
the  holder  of  the  spread  also  profits.  In  other  words,  the 
purchaser  of  a  spread  is  said  to  "play  the  two  ends  against 
the  middle";  he  has  two  chances  to  make  moncv  and  his 
loss  in  any  case  is  limited  to  the  cost  of  the  spread. 

Straddle.  A  straddle  is  similar  to  a  spread  with  the  ex- 
ception that  only  one  price  is  named  in  it.  The  stock  may 
be  called  for  or  delivered  at  this  one  price  only.  As  in  the 
other  cases,  the  stock  must  go  up  or  down  more  than  the 
amount  paid  for  the  straddle  before  there  is  a  ]trofit  in  it. 

Under  the  rule.  Tliis  is  a  term  used  to  describe  an  of!i- 
cial  transaction  made  on  the  New  York  Stock  Exdiange. 
In  case  a  member  of  the  Exchange  fails  to  receive  or  de- 
liver stock  in  accordance  witli  his  contract  of  purchase  or 
sale,  the  stock  in  question  is  bought  or  sold,  as  the  case  may 
))e,  by  the  chairman  of  the  Exchange  for  the  account  of  the 
delinquent  memlier,  and  any  difTcrence  in  cost  is  charged 
or  credited  to  him.  "When  transactions  of  this  kind  are 
put  through  they  are  known  as  ])urchascs  or  sales  made 
** under  the  nile.'' 

Washing.    This  term  describes  the  operation  of  simul- 


WALL  STREET  PHRASES  AND  METHODS    377 

taneous  buying  and  selling  the  same  stocks  for  the  purpose 
of  making  quotations  and  inducing  outside  speculation  or 
interest  in  the  stock  by  imparting  apparent  activity  to  it. 
Washing  is  usually  employed  when  manipulation  of  some 
kind  is  in  progress. 

Watered  stock.  A  term  used  to  describe  the  capital 
stock  of  a  company  which  is  not  supposed  to  be  represented 
with  a  corresponding  amount  of  assets.  The  term  as  used 
is  a  vague  one  and  is  subject  to  several  interpretations. 
For  instance,  when  a  stock  dividend  is  declared  the  original 
stock  is  said  to  be  watered  to  that  extent,  unless  the  newly 
issued  stock  represents  added  property  or  value  in  some 
form. 

Ex-dividend.  When  a  stock  upon  which  a  dividend  has 
been  declared  is  sold  and  the  price  is  not  to  include  the 
amount  of  the  dividend  to  be  shortly  paid,  the  stock  is  said 
to  be  sold  "ex-dividend." 

In  Wall  Street  no  one  is  always  right;  cheap  advice  is 
plentiful;  some  men  leani  only  by  failing;  losses  make  us 
more  cautious;  interrogate  before  you  negotiate;  money 
is  most  valued  when  lost;  don't  buy  an  Qgg  until  it  is  laid; 
fraud  is  built  on  misrepresentation;  speculation  begins 
when  certainty  ends;  opportunity  is  often  lost  by  deliber- 
ating; get  infonnation  before  you  invest,  not  after;  get  an 
investment  that  will  let  you  sleep;  it  is  idle  to  wait  for  your 
ship  to  come  in  unless  you  have  sent  one  out;  those  who 
lament  their  misfortunes  are  generally  they  who  do  not 
recognize  their  opportunities;  buyers  of  stock  belong  to 
two  classes:  those  who  trade  on  tendencies  and  who  take 
hold  wherever  the  market  is  active  without  much  reference 
to  values  or  prices,  and  those  who  always  try  to  buy  when 
prices  are  down  instead  of  when  they  are  up. 

In  Wall  Street  the  investor  detennines  the  prices  of 
stocks  in  the  long  run.  This  statement  is  sometimes  dis- 
puted by  those  who  point  to  the  fluctuations  which  are  con- 
fessedly made  by  manipulators  without  regard  to  value. 


378  JOHN  MOODY 

It  is  true  that  sueli  fluctuations  do  occur,  but  when  the 
mauipulatiou  is  over  the  influence  of  the  investor  is  again 
felt.  If  he  decides  that  a  given  stock  is  worth  only  so  much 
the  manipulator  will  ultimately  be  compelled  to  accept  that 
valuation,  because  manipulation  cannot  be  kept  uj).  The 
general  object  of  manipulation  is  to  buy  below  value  and 
sell  above  value. 

*'An  important  influence  of  the  stock  exchanges,  and  in 
some  ways  also  of  the  produce  exchanges,  is  the  influence 
they  exert  upon  the  money  market.  The  possession  by  any 
coimtry  of  a  large  mass  of  salable  securities  affords  a  power- 
ful guarantee  against  the  affects  of  a  severe  money  panic.  If 
in  New  York  there  arises  a  sudden  pressure  of  money,  so 
that  confidence  becomes  impaired  and  people  having  con- 
tracts entitling  to  future  or  immediate  delivery  of  money  in- 
sist that  these  contracts  shall  be  executed  in  money  instead 
of  other  fonns  of  promises,  what  happens?  The  banks  call 
in  loans  and  begin  to  hold  their  cash.  If  they  hold  large 
quantities  of  securities  salable  on  the  London,  Paris  or 
Berlin  market  a  cable  order  will  affect  the  sale  of  these  in 
an  hour,  and  the  gold  proceeds  will  be  on  their  way  across 
the  Atlantic  in  a  day. 

"Wonderful  has  been  the  effect  within  the  last  twenty- 
five  years  of  this  steady  influence  of  the  stock  market  upon 
the  demand  for  money  and  upon  the  smoothness  of  the 
operations  of  the  mechanism  of  the  exchanges.  AVhat  has 
just  been  put  in  a  crude  form  by  referring  to  a  crisis  oc- 
curs daily  and  Ikmu'Iv  on  the  stock  exchanges,  and  prevents 
sudden  contraction  and  expansion  in  the  rate  for  loans. 
The  manufacturer  goes  ]-)lacidly  on  ]">aying  his  4  or  5  ]H'r 
cent  for  commercial  loans,  when  if  there  were  no  stock 
exchanges  where  securities  could  be  sold  in  one  market  at 
a  slight  profit  over  another,  he  would  find  that  his  bank 
was  firet  charging  7  or  8  per  cent,  then  dropping  to  3  or  4 
and  then  going  back  to  8.  By  means  of  the  facilities  which 
the  stork  ninrkct  affords  for  placing  rrodit  instantly  at  the 


WALL  STREET  PHRASES  AND  METHODS    379 

command  of  one  market  or  another  the  pressure  for  money 
is  mitigated,  and  has  put  a  limited  effect  upon  the  commer- 
cial borrower.  Such  pressure  as  now  occurs  is  transferred 
to  the  borrower  on  call— the  broker  in  stocks,  who  thus 
acts  as  insurer  for  the  commercial  borrower.  This  influence 
of  the  stock  market  has  much  the  effect  of  a  buffer  upon  the 
impact  of  two  solid  bodies.  Crises  are  prevented  when  they 
can  be  prevented,  and  when  they  cannot  they  are  antici- 
pated, and  their  force  is  broken  into  a  mild  succession  of 
ripples  instead  of  a  tidal  wave."— Chas.  A.  Conant,  "Wall 
Street  and  the  Country." 


QUESTIONS  IN 
INVESTMENTS  AND  SPECULATION 

Distinction  Between  Investment  and  Speculation. 

1.  TMiat  is  the  distinction  between  investment  and  spec- 
ulation? Pages  3,  5. 

2.  How  may  a  mortgage  become  a  speculation? 

Pages  5,  6. 

3.  How  do  large  investors  protect  their  capital  against 
unknown  risk?  Page  7. 

4.  Show  how  some  states  protect  investors.       Pages  8,  9. 

5.  What  is  the  rcLation  between  the  output  of  gold  and 
the  income  from  investments?  Pages  10,  11. 

6.  "What  are  some  of  the  evidences  of  wise  investments 
in  the  United  States?  •  Page  12. 

Real  Estate  Loans. 

1.  Name  two  characteristics  of  a  safe  investment. 

Page  13. 

2.  What  was  the  earliest  form  of  investment?      Page  14. 

3.  Describe  brieflv  the  historv  of  farm  loans. 

Pages  14,  15. 

4.  Wliv  are  real  estate  loans  the  most  satisfactorv? 

Page  15. 

5.  What  determines  the  rate  of  interest  paid  on  loans? 

Page  17. 

6.  Outline  three  ways  in  which  the  small  investor  may 
secure  fann  mortgages.  Pages  16,  18. 

7.  Show  how  har^^est  time  affects  interest  rates  on  loans. 

Pages  19-21. 

8.  What  is  a  reserve  center?  Page  20. 

381 


382  QUIZ  QUESTIONS 

9.     Distiiii^niisli  between  call  and  time  loans.         Page  20. 

10.  What  factors  enter  into  the  value  of  city  real  estate? 

Page  22. 

11.  AVhat  precaution  should  he  taken  before  investing  in 
city  real  estate  loans?  Page  24. 

12.  Show  why  a  first  mortgage  real  estate  ])ond  is  desir- 
alde.  Pages  25,  26. 

13.  Why  should  investment  in  real  estate  debenture  bonds 
be  made  with  extra  care?  Page  26. 

14.  What  is  the  nature  of  a  leasehold  bond?    Pages  28,  29. 

Land  and  Real  Estate  Booms. 

1.  Show  how^  land  booms  may  benefit  communities. 

Page  30. 

2.  Wliv  are  extensive  land  booms  in  the  United  States 
not  likely  to  take  place  again?  Page  32. 

3.  Show  how  land  booms  often  bring  losses  to  investors. 

Page  33. 

4.  What  points  should  be  investigated  before  pui-diasiug 
a  farm?  Page  34. 

5.  Describe  the  stock-company  plan  of  owning  large  agri- 
cultural properties.  Page  35. 

6.  What  is  the  fii'st  essential  of  suburban  real  estate? 

Page  37. 

Multiplicity  of  Bonds. 

1.  Explain  the  difference  lietwecn  a  mortgage  ])ond  and 
a  real  estate  mortgage.  Page  3S. 

2.  Wliat  is  meant  by  the  term ''equity''?  Page  41. 

3.  Why  is  provision  now  made  for  redeeming  bonds  be- 
fore maturity?  Pages  43,  44. 

4.  Name  the  various  kinds  of  bonds.  Pages  44,  45. 

Government,  State  and  Municipal  Bonds. 

1.     Explain  how  national  banks  derive  jn'ofit  from  low 
rate  government  bonds.  Page  47. 


INVESTMENTS  AND  SPECULATION  383 

2.  What  security  is  behind  government  bonds? 

Pages  46,  49. 

3.  What  facts  nuist  be  investigated  by  bankers  before 
pui"chasing  municipal  bonds?  Page  53. 

Railroad  Bonds. 

1.  A\'hat  has  caused  the  great  variety  of  railroad  bonds? 

Page  54. 

2.  Name  and  explain  at  least  ten  classes  of  railroad 
bonds.  Page  57. 

3.  What  advantage  and  disadvantage  has  a  registered 
bond?  Page  61. 

Public  Service  and  Other  Bonds. 

1.  Define  a  public  service  corporation.  Page  63. 

2.  What  is  the  first  requisite  for  the  safety  of  a  pul)lic 
service  corporation  bond?  Pages  66,  67. 

3.  Explain  why  the  stability  of  public  service  corpora- 
tion bonds  is  generally  unaffected  by  panics. 

Pages  69,  70. 

4.  How  does  an  income  bond  differ  from  a  mortgage 
bond?  Page  72. 

5.  What  is  a  holding  corporation?  Page  73. 

6.  Tell  what  vou  know  about  collateral  bonds;  debenture 
bonds.  Pages  73,  74. 

7.  Whv  should  convertible  bonds  be  carefullv  scruti- 
nized?  Page  76. 

8.  Explain  the  use  of  the  short  tenn  note.     Pages  76,  78. 

Irrigation,  Mining,  and  Timber  Bonds. 

1.  Give  the  reasons  whv  irriijation  bonds  are  considered 
among  the  most  speculative  of  all  bonds.    Pages  82-85. 

2.  What  do  bonds  of  undeveloped  mining  properties  lack 
to  make  them  safe  investments?  Page  88. 

3.  Under  what  conditions  is  a  mining  bond  fairly  safe? 

Page  89. 


384  QUIZ  QUESTIONS 

4.  What  is  the  greatest  risk  in  timber  bonds?     Page  90. 

5.  Upon  what  are  timber  bond  issues  based?    Page  9CL 

Guaranteed  Stocks. 

1.  Explain  the  merits  of  guaranteed  stocks.    Pages  92,  93. 

2.  Exphiin  how  railroad  guaranteed  stocks  come  into  ex- 
istence. Pages  93,  94. 

Amortization  and  Sinking  Funds. 

1.  Define  amortization.  Page  95. 

2.  What  are  the  advantages  of  amortization?       Page  95. 

3.  Tell  how  a  sinking  fund  operates.  Pages  95,  96. 

The  Market  for  Bonds. 

1.  Why  is  an  active  market  not  essential  to  the  penna- 
nent  investor?  Pages  99,  100. 

2.  Explain  how  a  quick  market  may  bring  loss  to  inves- 
tors. Page  99. 

Character  of  an  Enterprise. 

1.  AMiat  statistics  prove  the  need  of  financial  education 
among  investors?  Page  101. 

2.  Name  the  points  to  be  considered  in  investigating  the 
nature  of  an  enterprise.  Pages  103,  104. 

3.  What  three  factors  should  enter  into  an  examinati(Ui 
of  the  i^resent  condition  of  an  enterprise.       Page  105. 

Science  of  Speculation. 

1.  Is  speculation  necessary  to  business?    Explain. 

Pages  109,  110. 

2.  What  part  did  speculation  have  in  the  formation  of 
the  United  States?  Page  111. 

3.  Give  proof  that  speculation  is  not  a  modern  force. 

Pages  112,  113. 

4.  Explain  why  speculation  cannot  be  said  to  be  a  science. 

Pages  113,  114. 


INVESTMENTS  AND  SPECULATION  385 

5.  Why  are  speculative  charts  poor  guides  for  the  inves- 
tor? Page  114. 

6.  Discuss  margins  in  specuhxtion.  Pages  117,  118. 

Efforts  to  Prevent  Speculation. 

1.  Give  an  instance  of  harm  caused  bv  elimination  of 
speculation.  Page  120. 

2.  What  is  the  difference  between  speculation  and  gam- 
bling? Page  121. 

3.  ^Mierein  lies  the  evil  in  speculation?  Page  124. 

4.  Name  one  of  the  benefits  arising  from  speculation. 

Pa2:e  127. 


'&' 


The  Mystery  of  a  Balance  Sheet. 

1.  'Wliy  should  a  corporation  render  financial  statements 
to  its  stoclvholders  ?  Page  128. 

2.  AVhat  items  should  not  appear  among  the  assets  of  a 
trustworthy  financial  statement?  Page  132. 

3.  AMiat  is  the  proof  of  a  good  asset?  Page  132. 

4.  Give  a  list  of  assets  that  should  appear  in  the  state- 
ment of  a  healthy  manufacturing  concern.    Page  133. 

Functions  of  Exchanges. 

1.  Outline  the  functions  of  stock  exchanges. 

Page  138,  139. 

2.  Explain  what  makes  a  seat  on  a  stock  exchange  of 
great  value.  Page  141. 

3.  Distinguish  between  si^eculation  and  gambling. 

Pages  144, 145. 

Methods  of  Trading. 

1.  Desciibe  two  methods  of  trading  employed   on  the 
stock  exchange.  Pages  147-151. 

2.  Show  the  difference  between  ''bulls"  and  "bears"  in 
the  stock  market.  Pages  155,  157. 

B.VII— 25 


386  QUIZ  QUESTIONS 

3.  Tell  how  bucket-shops  arc  operated.  Pa^e  158. 

4.  What  is  the  incauiug  of  the  tcim  "cx-dividcnd"  ? 

Pages  158,  159. 

5.  How  do  "i>iit"  and  "call"  contracts  operate? 

Pages  160,  161. 

6.  AVhat  do  you  understand  is  the  difference  between  a 
curb  market  and  a  stock  exchange  ?        Pages  169,  17U. 

Panics. 

1.     What  was  the  cause  of  the  panic  of  1907. 

Pages  173,  174. 

L!.     Wliat  are  some  of  the  symptoms  of  a  coming  ])usiness 

panic?    Explain.  Pages  175,  176. 

Pools  and  Manipulation. 

1.  Describe  the  workings  of  a  i)ool.  Pages  180,  181. 

2.  How  are  stocks  manipulated?  Pages  182,  183. 

3.  Why  should  only  the  rich  man  indulge  in  speculation? 

Page  187. 

The  Promoter's  Place  in  Finance. 

1.  p]xplain  the  promoter's  place  in  tinancc.  Pages  188,  189. 

2.  AVhat  is  the  best  way  for  an  invest(»r  to  judge  a  pro- 
moter? *  Pages  189,  190. 

3.  Why  is  the  nn]i-listing  of  a  stock  no  disadvantage  to 
the  investor?  Pages  192,  193. 

4.  Dcsciibc   the   workings   of  a    got-rich-quick   mining 
scheme.  ^  Pages  200,  201. 

General  Principles  of  Investment. 

1.  Show  win"  a  bond  is  generally  a  better  investment 
than  a  stock.  *  Pages  209.  210. 

2.  Name  and  ex]^lain  the  principles  of  selection  of  invest- 
ments. Pages  211-214. 

3.  How  mav  a  banker  be  compared  with  a  physician? 

Pages  208,  215. 


INVESTMENTS  AND  SPECULATION         387 

Safety  and  Security. 

1.  Outline  the  points  to  be  considered  in  judging  the 
value  of  a  railroad  bond.  Pages  218-220. 

2.  How  may  safety  in  a  security  be  a  disadvantage  to  the 
investor?  Page  227. 

3.  Why  is  a  stock  exchange  quotation  often  no  indication 
of  the  real  value  of  a  security?  Page  228. 

4.  Name  two  safe  rules  for  the  investor  to  follow. 

Pages  228,  229. 

Obligation  of  Investment  Banker. 

1.  Explain  the  relation  between  the  responsible  invest- 
ment banker  and  his  clients.  Pages  231-233. 

2.  Why  is  the  public  service  corporation  bond  one  of  the 
best  for  the  average  investor?  Pages  233,  234. 

Fundamentals  and  Security  Prices. 

1.  Show  how  crops  affect  the  prices  of  securities. 

Pages  240,  241. 

2.  How  are  security  prices  affected  by  money  conditions? 

Pages  241-245. 

3.  Explain  the  effect  of  the  Standard  Oil  decision  on  secu- 
rity prices.  Pages  247-249. 

Market  Movements  of  Securities. 

1.  Illustrato  how  money  rates  influence  different  grades 
of  securities  differently.  Pages  252,  253. 

2.  Describe  the  important  stages  through  which  business 
conditions  pass  from  rrisis  to  crisis.        Pages  253-255. 

Stocks  and  Their  Features. 

1.  What  is  meant  by  the  par  value  of  a  share  of  stock? 

Pages  258-260. 

2.  What  do  you  understand  by  assessable  stock? 

Pages  261,  262. 


388  QUIZ  QUESTIONS 

3.  What  two  advantages  often  lie  in  common  stock? 

Pages  262,  263. 

4.  Name  the  various  kinds  of  stocks.  Page  263. 

5.  Explain  the  nature  of  prefei'red  stock.         Page  265. 

6.  Ilnw   ni.iy  conunon  stock  dividends  be  affected  when 
the  preferred  stock  is  cunudative?         Pages  265,  266. 

7.  AVhat  benefit  usually  rests  iu  preferred  stock  as  to 
assets?  ^  Pages  267,  268. 

8.  Why  is  callable  stock  often  a  disadvantage  to  tlu' 
holder?  Page  271. 

9.  Explain  the  advantage  of  possessing  a   convertible 
stock.  Pages  271-273. 

10.     Why  are  participating  preferred  stocks  preferable 
to  ordinary  preferred  stocks?  Pages  274,  275. 

Stock  Markets  and  Exchanges. 

1.  IIow  does  the  law  distinguish  between  speculation  and 
gambling?  Page  282. 

2.  "Wliat  do  you  laiow  about  the  New"  Y(U'k  Stock  Ex- 
change? Pages  284,  285. 

3.  Why  should  the  present  practice  of  margin-trading 
be  changed  ?  Page  287. 

4.  Why  is  short-selling  not  considered  gambling? 

Pages  288,  289. 

5.  TTow  ai'e  securities  listed  on  the  (exchange?    Page  294. 

6.  Describe  the  Consolidated  Stock  Exchange  of  New 
York.  Pages  299,  :^00. 

7.  Tell  h(»w  the  cui'l)  market  obtained  its  name.  Page  304. 

8.  Wherein  lies  the  evil  of  the  curb  market? 

Pages  305,  306. 

Classification  of  Bonds. 

1.  Describe  the  three  kinds  of  corporations.      Page  313. 

2.  Diseuss  the  three  large  classes  of  bonds. 

York.  Pages  299,  300. 


INVESTMENTS  AND  SPECULATION  389 

Public  Service  Corporation  Bonds. 

1.  What  points  are  covered  in  an  investigation  of  a  pnb- 
lic  service  corporation?    Disenss.  Pages  335-338. 

2.  What  is  the  function  of  public  service  commissions? 

Pages  338,  339. 

3.  Give   four  reasons   why   public  service   corporation 
bonds  are  growing  in  popularity.  Pages  340,  341. 

4.  Give  five  rules  to  follow  in  buying  public  ser\dce  cor- 
poration bonds.  Pages  342,  343. 

Forecasting  Trade  Conditions. 

1.  How  does  the  area  theor^^  differ  from  the  early  forms 
of  charts?  Page  345. 

2.  AVhat  relation  exists  between  the  area  of  prosperity 
and  the  area  of  depression?  Pages  348,  349. 

3.  How   are   trade   conditions   forecasted   by   the   area 
theory?  Pages  349,  350. 

4.  What  is  the  use  of  the  index  figure  in  making  a  com- 
posite plot?  Page  353. 

5.  How  does  the  composite  plot  aid  the  merchant? 

Pages  361,  363. 

6.  ^liy  should  bankers  watch  the  composite  ph^t? 

Pages  367,  368. 

Wall  Street  Phrases  and  Methods. 

1.  How  may  a  speculator  recover  his  loss  by  averaging? 

Pages  370,  371. 

2.  How  may  pyramiding  bring  ruin  to  a  speculator? 

Pages  375,  376. 

3.  How  is  it  true  that  in  the  long  run  investors  determine 
the  price  of  stocks?  Pages  377,  378. 


INDEX 

INVESTMENTS  AND  SPECULATION. 


ADVERTISIXG— 

assists    fraud.    307,   308. 
AMORTIZATION— 

detinition  of,  95. 
ARBITRAGE— 

term   explained,   370. 
AREA  THEORY— 

forecasting  trade  conditions  by,  344- 
36y. 
ASSETS— 

false,    in    financial    statements,    130, 
132. 

proof  of  good,   132. 

what  constitutes  good  assets  in  finan- 
cial   statements,   133,   134. 
AVERAGING— 

term  explained,  370,  371. 

BANKERS— 

clients  and  investments,  231-235. 

deal  with  reliable,  343. 

investigate   bond   issues,  232-234. 

obligation   of,    to   clients,   231-235. 
BEAR— 

term  explained,  155-157,  371. 
BILL  OF  EXCHANGE— 

term  explained,  371. 
BLIND   POOL— 

term  explained,  371. 
BOBTAIL  POOL— 

term  explained,  371. 
BONDS— 

accrued  interest  added  to  price,  147. 

active  market  not  essential,  99.  100. 

business   conditions   afTect   price   of, 
257. 

classifications   of,   329-331. 

collateral,  described.  73.  74,  320,  321. 

convertible,  described,  75,  76,  322. 

debenture,  described,  26,  74,  75,  327. 

equity   in,   41. 

first   mortgage   real   estate,   25. 

form  of,  important.  223,  224. 

government.  46-49.  315. 

government,  when  decline  in  value. 
3. 

improvement.  316. 

income,  described,  72. 

interest  and  income  not  always  the 
same,  77,  78. 

investment   banker   and    his   clients, 
232-235. 

irrigation,  highly  speculative,  85. 


BONDS— Continued 

irrigation,  security  behind,  83-86. 
kinds    of,    enumerated,    44,    45,   329- 

333. 
leasehold,  definition  of,  28,  29. 
lien.  318,  319. 

mining,   safe  and   unsafe,   87-89. 
money  rates  affect,  difTerently,  252, 

253. 
mortgage,  described,  38-40,  327. 
municipal,  51-53,  314,  315. 
private  and  quasi-public,  315,  316. 
public     service     corporation,     63-67, 

332-341. 

investigation    of,   335-338. 

popularity  of,  332,  340. 
railroad,  54-62,  218-220. 

kinds   of,  54-62. 

value  considered,  218-220. 
redemption  of,  provided  for,  44. 
refunding,  318. 
rules  for  safe  investment, 
safety  of,  considered,  216- 
state.  50,  51,  315. 


342 
-218. 


343. 


with. 


as    mvest- 


stocks    compared 

ments,  209,  210. 
subsidj-,  325. 
timber,  90,  91. 

women  and  estates  should  avoid  cer- 
tain, 98. 
BONDMARKET— 

active,    not    essential    for    perma- 
nent investor,  99,  100. 
BOOMS— 

illustrations  of,  194-197. 

BRITISH  CONSOLS— 

explanation  of,  47,  48. 

have   fallen  to  low  price,  4. 
BUCKETING— 

term  explained,  371. 

BUCKET-SHO  PS- 
forbidden    by   law,   184,  310. 
gambling  shops,  125. 
kept  in  operation  by  bulls,  158. 
term  explained.  372. 

BULLS— 

defined,  155-157. 

CALL— 

term  explained,  372. 
CALLABLE  PREFERRED  STOCK— 

discussed,  271. 


391 


392 


INDEX 


CALL  LOAN'S— 

discussed,  20.  149,  150. 
CAPITAL— 

gravitates    to    money    centers,    113, 
144. 

how  protected  by  large  investors,  7. 

interest  rates  determined  by  amount 
of.   17. 

markets  abroad.  170.  171. 

no  absolute  security  in  investment,  7. 

panics   caused   bv   demand   for,    173, 
174. 
CERTIFICATES  OF  DEPOSIT— 

defined,  79,  80. 
CHARTS— 

history  of,   344-345. 

single  line,  34.">. 
CITY   REAL  ESTATE— 

care  necessar>'  in  investing  in,  24. 

compared  with  farm  land,  22. 

factors  influencing  value  of,  22. 
CLEAR  I  .\'G  H  O  U  SE— 

in  New  York  Stock  Exchange,  146, 
296. 
COLL.\TERAL  TRUST  BONDS— 

discussed.  73,  74,  320,  321. 
COMMON  STOCK— 

advantages  of,  262-264. 
CONSOLS— 

explanation  of,  47,  48. 

have    fallen  to  low  price,  4. 
CONVERTIBLE  BONDS— 

discussed,  7.'>,  76,  322. 
CONVERTIBLE  STOCKS— 

di.scussed,   271-273. 
CORNERS— 

panics  caused  by.   176. 

term  explained.   176-178,  372. 
CORPORATIONS— 

financial   statements   false  and  true, 
130-134. 

financial  statements  should  be  rend- 
ered stockholders,  128. 

kinds  of,  313,  314. 
COVERING— 

term  explained,  372. 
CRO PS- 
cotton  exchanges,  167. 

grain  exchanges,  163-166. 

money  market  affected  by,  19-21. 

security  prices  affected  by,  240,  241. 

watched  bv  experts,  16."),  166. 
CUMULATIVE  DIVIDENDS— 

discussed,    26.'")-267. 
CURB  MARKET— 

description  of  New  York,  304-307. 

evils  of.  SO.-),  306. 

origin  of  name,  304. 

stock  exchange  distinguished   from, 
169,   170. 

DEBENTLT^E  BONDS— 
described,  327. 


DEBENTURE   BONDS— Continued 

investment  in   real  estate  debenture 
bonds    should    be   made    with 
care,  26. 
DEBENTURE  STOCK— 

discussed,  279. 
DEFERRED  STOCK— 

discussed,  264,  265. 
DUE  BILL— 

term  explained,  373. 

ENTERPRISES— 
finances  of,  106. 
how  to  investigate,  103-108. 
operation  of,   105. 
organization  of,  103. 
property  of,  105. 

EQUITY— 

compared  with  promise  to  pay,  209- 
210. 

meaning  of,  in  bonds,  41. 
EX-DIVIDEND— 

meaning  of,  138,  159,  377. 

FARM   LAND— 

compared   with  city  real   estate,  22. 
loans  on,  most  satisfactory,  15. 
points  to  be  considered  in  buying.  34. 
stock-company  plan   of  owning,  35. 

FINANCIAL  STATEMENTS— 
false  and  true,   130-134. 
stockholders  should  receive,  128. 

FLAT— 

term  explained,  373. 
FOUNDERS'  STOCK— 

discussed,  278,  279. 
FR.\UD— 

advertising  assists.  307.  308. 

amount  invested  in,  annually,  101. 

newspapers   aid   investment   in,    101, 
102. 
FUNDAMENTALS— 

discussion  of.  239-246. 

security    prices,     relation    between, 
236-246. 

GAMBLING— 

bucket-shops,   125.   184,  310. 

defmed  in  law,  282. 

difficult  to  distinguish,  284. 

speculation  distinguished   from,  121, 
144,    145. 
GET-RICH-QUICK  SCHEMES— 

government   is    lighting,   19S,   200. 

losses  from,  199. 

sugRested  curb  on,  205. 

workings  of,  200-203. 
GIVING  UP— 

term  explained,  373. 
GOLD— 

supply  of.  influences  investment  in- 
come, 11. 


INDEX 


393 


GOVERXMEXT  BOXDS— 

British,  described,  47,  48. 

decline  in  value,  possible,  3. 

foreign,  48. 

national  banks  invest  in,  46,  47. 

sccuritv  behind,  4it. 
GRAIX   E'XCHAXGES— 

discus'sed,   IG:?-!!)*). 
GUARAXTEED  STOCK— 

discussed,  277,  278. 

HOLDIXG  COMPAXIES— 

described.  7;i,  :«)O-302. 
HYPOTHECATIOX— 

term  explained,  373. 

IMPROVEMEXT  BOXDS— 

described,  316. 
IXTEREST— 

course  of  money,  after  crisis,  2.")6. 

investment,    small     compared    with 
business,  209. 

security   prices  affected  by  rate  of, 
251.   2r)2. 
IXTEREST-BEARIXG    STOCKS— 

discussed,  275,  276. 
IXTEREST  RATES— 

crops  intlucnce.  19-21. 

determined  bv  amount  of  capital,  17. 
IXTERIM  CERTIFICATES— 

defined,  78. 
IXVESTMEXTS— 

advice  may  be  fatal,  227. 

amount  lost  annually  in,  101. 

banker's  business,  208,  215. 

banker's  place   in,  231-235. 

bonds    distinguished      from    stocks, 
209.  210. 

city  real  estate  compared  with  farm 
lands.  22. 

definition  of.  3. 

distinguished  from  speculation,  5,  6. 

distribution  of   risk,  209,  210. 

farm  land  loans  the  most  satisfac- 
tory, 15. 

farm  lands,  points  to  be  considered 
in  buying,  34. 

first   form   of.    14. 

form    of    document    should    be    ex- 
amined, 223.  224. 

fraud,  amount  of.  101. 

fundamental  law  governing.  10. 

get-ricb-quick    schemes    cause   great 
losses,    199. 

government    and    municipal    bonds 
sati.s factory,  53. 

guaranteed   stocks.   92-94. 

how  to  investigate  enterprises.  103- 
108. 

income  influenced  by  supply  of  gold, 
11. 

interest  small  compared  with  busi- 
ness interest,  209. 


IXVESTMEXTS— Continued 

irrigation  bonds  highly   speculative, 
85. 

market  quick,  not  always  essential, 
99,   100. 

mining  bonds  highly  speculative,  87, 
88. 

no  absolute  safety   for  capital,  7. 

no  unchangeable  rules  governing,  4. 

principles  of,  209-211. 

private  and  business,  215. 

problem  of  human  judgment,  6. 

protected  by  state  laws,  8,  9. 

public  service  corporation  bonds,  69, 
332-338. 

railroad  bonds  of  many  varieties,  57- 
62. 

result  of  wise  investments  in  United 
States   12 

rules   for  safe.  228-230,  342,  343. 

safe,  for  women  and  estates,  98. 

safety  may  cost  too  much,  227. 

safety  of  bonds  considered,  216-218. 

selection   important,   211-215. 

short  term  notes,  76,  77. 

timber  bonds  are  speculative,  90. 

vital  force  in  business,  1. 
IXVESTORS— 

how  protect  their  capital,  7. 

rules   for,  228-230,  342.  343. 

speculation,  who  should  avoid,  186, 
187. 
IRISH   DIVIDEXD— 

term  explained,  160,  374. 
IRRIGATIOX  BOXDS— 

governmental  attempt  to  protect,  82, 
83. 

highly  speculative,  85. 

security  behind,  83-86. 
JOIXT  ACCOUXT— 

term  explained,  374. 

LAXD  BOOMS— 

communities  benefited  by,  30. 
disaster  resulting  from.  33.  34. 
no  more  likely  in  United  States,  32. 

LEASEHOLD  BOXDS— 
definition  of,  28,  29. 

LIEX    BOXDS— 

discussed,  318,  319. 

LOAXS— 

call   and   time,   distinguished,  20. 
city  real  estate,  22,  24 

care  necessary  in  making.  24. 
factors  influencing  value  of, 
82. 
LOXG  OF  STOCKS— 

term  explained,  158,  374. 

MAXIPULATIOX— 

of  stock  prices,  290.  291. 
pools  used  for.  182. 
term  explained,  374. 


394 


INDEX 


MARGIN'S— 

evils  of  trading  in,  152. 

term  explained,  117,   118,  374. 

trading  in.   148.   1.50-153. 
M.\TCHED  ORDERS— 

discussed,  291,  292. 
METHODS— 

Wall  Street.  :^70-379. 
MINING  BONDS— 

safe  and  unsafe,  87-89. 
MONEY- 

course  of  rates  after  crisis,  256. 

security   prices   affected   by    interest 
rates,  2r)l,  252. 
MONEY   M.XRKET- 

crops  influence,  19-21. 

security  prices  affected  by,  241-245. 

speculation   influenced   by,   302,   303. 
MORTG.\GFS— 

distinguished  from  mortgage  bonds, 
38. 

farm  land.  14-18. 

first  form  of  investment,  14. 
how  placed,  16.  18. 

real  estate  bonds  desirable,  25,  26. 
MUNICIP.\L  BONDS— 

how  financed,  51-53. 

issuance  of.  314.  315. 

legality  and  taxation  of,  53. 

NEW  YORK  CON  SOLI  n.\TED 

STOCK  EXCH.\XGE— 

description  of,   299,  .^00. 
NEW    YORK    CURB    M.XRKET— 

description  of,  ,104-307. 
NEW  YORK  STOCK  EXCHANGE- 

annual  business  of,  140. 

clearing-house,   146,  296. 

commission  charged,   141. 

description   of,   136,   137.  284-298. 

incorporation      not      recommended, 
297.  298. 

legislation   recommended,  309-311. 

listing  of  slock.  294. 

margin-trading  on,  286,  287. 

patrons  of.  285,  286. 

short-selling   on,   288,  289, 

OUTSIDE   BROKER— 
term  explained,  379. 

PANICS— 

benefits  of,  175. 
causes  of,   173,   174,   176. 
central  bank  might  prevent,  175. 
corners  may  cause,  176. 
kinds  of,   172. 
occur  irregularly,  115. 
public  service  corporations  general- 
ly unafTected  by,  69. 
speculation  symptom  of.  172. 
warnings  of,  175,  176, 


PARTICIPATING   PREFERRED 

STOCKS— 
discussed,  274,  275. 

PARTICIPATION  CERTIFICATES— 

described.  260. 
PAR  VALUE— 

meaning  of.  in  stocks,  258,  259. 
PASSING  A  DIVIDEND— 

term  explained,  375. 
PHRASES— 

Wall    Street,   370-379. 
PLOTS— 

history   of,   344-345. 
POOLS— 

operations  of.  179-181. 
stocks  manipulated  by  means  of,  182. 
PREFERRED  STOCK— 

discussed.  265-269. 
PRICES— (See  Security  Prices). 
PRIVATE     AND     QUASI     PUBLIC 
BONDS— 
described,  315,  316. 
PRIVILEGE— 

term  explained,  375. 
PRODUCE  EXCHANGES— 
cotton   operations.    167. 
grain  operations.  163-166. 
trading  on.    154,   1.55. 
PROMOTER- 

how  ma.y  an  investor  judge,  189-191. 
place  of.  in  finance.  ISS.   1S9. 
PUBLIC  SERVICE  COMMISSIONS— 

function   of.    338.   339. 
PUBLIC   SERVICE  CORPORATION 
BONDS— 
first-class  for  average  investor.  233, 

234. 
franchise   first   requisite   for  safety. 

66.  67. 
investigation   of,   335-338. 
popularity   growing.   332.   333. 
reasons  for  popularity,  340,  341. 
stabilitv  of,  (•.<».  70. 
PUBLIC   SERVICE  CORPORA- 
TIONS— 
bonds  of.   63-67.   332-341. 
commission^nromote  stability  of,  69. 
holding  cflHtfues   formed.   70,   71. 
panics  do  ^^Kiffect,  69,  70. 
progress  o^R33,  334. 
PL'T- 

term  explained,  160.  375. 
PYRAMIDING— 

term   expMlined.   375,  376. 

RAILROAD  BONDS— 

kinds  of,  54-62,  221.  222. 

v.nhie   of.  considered.  218-220. 
REDEMPTION— 

provision   for.  in  bonds.  44. 
REFUNDING   BONDS— 

described,  318. 


INDEX 


395 


REHYPOTHECATION  OF  SECURI- 
TIES— 
discussed,  293,  294. 

RIGHTS  IN  STOCK— 

detined,  159. 
RISK— 

chansfcs  continually,  3,  4. 

distribution,  a  principle  of     invest- 
ment, 209,  210. 

SAFETY— 

importance  of,  227. 
methods  of  judging,  in  bonds,  21C- 
218. 

SECURITY— 

banker's  obligation   to   clients,   231- 

235. 
document  form  important,  223,  224. 
essential   rather  than    income,   98. 
essential    rather   than   market,    100. 
government  bonds  and  taxation,  49. 
irrigation   bonds,    83-86. 
listed  and  unlisted.  191-193,  228. 
one-third  worthless,  222. 
principle   of   selection,   211-215. 
rules  to  follow  in  investing.  228-230. 
safety  costs,  227. 

SECURITY  PRICES— 

basis  of,  236. 

business  conditions   affect,    257. 

causes  of   regular  changes   in,   253- 
257. 

conditions  influencing,  10,  251,  252. 

crops  affect,  240,  241. 

fluctuation  caused  by  supply  and  de- 
mand, 10. 

foreign   trade  affects,  245.  24G. 

fundamentals,  relation  between.  236- 
246. 

money  market  affects,  241-245. 

Standard  Oil  decision  and  effect  on, 
247-249. 

stock  exchanges  affect,  138. 
SHORTS— 

detined,    158. 
SHORT  S.VLES— 

defined,  288,  289.        * 
SHORT  TERM   .VOTES— 

described,   76,   77. 
SINKING  FUNDS—     ^ 

operation  and  advantages  of,  95,  96. 
SPECULATION— 

ancient  force,   112,   113. 

artificial,    179. 

benefits  arising  from,  127. 

booms,  194-197. 

bucket-shops   aided,    125. 

charts  are  poor  guides  in,  114,  115. 

common   in   every-day   life,    121-124. 

corners  may  cause  panics,   176. 

definition   of,  3,  237.  2S1-283. 

efforts  to  prevent,  119-121. 


SPECULATION— Continued 

elimination    of,    brought    injury    to 
(jermany,   120. 

essential  to  business,  109,  110. 

evil  in,   124-12."). 

fundamental   law  governing,   10. 

gambling    distinguished     from,    121, 
144,  145. 

history  shaped  by,  110,  111. 

how  differs  from  investment.  5,  6^ 

land   booms,   30,   33,   34. 

loss   in  get-rich-quick  schemes,   199. 

margins   in.   117.   118.   151-153. 

money  market  influences,  302,  303. 

not  a  sxrience,  113,  114. 

pitfalls  of,  184-187. 

rich  man's  pastime,  187. 

symptom  of  panics,  172. 

vital   force  in  business,  1. 

who  should  not  indulge  in,  186,  187. 
SPREAD— 

term  explained,  161,  376. 
STATE  BONDS— 

how  disposed  of,  50. 

issuance  of,  315. 
STOCK  CERTIFICATES— 

classification  of,  263. 

participation   certificates,  260. 

par  value  of,  meaning  of,  258,  259. 
STOCK   EXCHANGES— 

barometers  of  trade,   138,  139. 

capital  attracted  by,  144. 

commission  charged  in    New   York, 
141. 

curb    markets     distinguished    from, 
169,    170. 

function  of,   138,  143. 

in  Boston,  167. 

in  Chicago,  167,  168. 

in    New   York,   136,   137,  284-298. 

margin-trading  on,  144,  148.  286,  287. 

matched  orders,  291,  292. 

membership  valuable,   139,   140. 

methods  of  trading  on,   147. 

prices   influenced  by,   138. 

quotations   on,    154,   228. 

rehypothecation  of  securities,  293, 
294. 

securities  of.  how  listed,  294. 

wash-sales  in,  291. 
STOCKS— 

assessable,  201.  262. 

callable,  disadvantage  of.  271. 


common. 


262-264. 


convertible,   advantage   of.   271-273. 

cumulative   dividend,   265-267. 

debenture.   279. 

deferred.   264.  265. 

ex-dividend,    meaning   of,    158,    159, 

377. 
founders',  278,  279. 
guaranteed,   92-94,  277,  278. 
how  listed,  294. 


396 


INDEX 


STOCKS — Continued 

interest-hearing.    27."),   276. 

Irish   dividend,   defined,    160. 

listed   and   unlisted.    191-193,  228. 

manipulation  of,  through  pools,  182. 

margin-trading  in.    H8,   I,"i0-l.'j3. 

participating  preferred,  274,  275. 

pools   used  to  exploit,  179-181. 

preferred,   265-269. 

prices  of,  manipulation  of,  290,  291. 

put    and    call    contracts,    explained, 
160,   161. 

ri^'hts,  defined,  159. 

spread    and    straddle   contracts,    ex- 
plained,   161,   162. 

test  of  good,  193. 
easury,  261. 
STR.ADDI  E— 

term   explained,   161,  376. 
SUBSIDY  BOXDS— 

discussed.  325. 
SUBURB.W  REAL  ESTATE— 

first  essential  of,  37. 

TIMBER   BOXDS— 
described,  90,  91. 


TREASURY  STOCK— 

discussed,   261. 
TRUSTEE— 

duties    of,    in    re    mortgage    bonds, 
39-40. 

TRUST  RECEIPTS— 
defined,  78. 

UNDER  THE  RULE— 

term   explained,   376. 
USURY— 

discussed,  303,  304. 

VALUE— 

made  by  men,  5. 

WASHING— 

term   explained,   376,  377. 

WASH-SALES— 
condemned,   291. 

WATERED  STOCK— 

term  explained,   377. 
WOMEN— 

investments  for,  should  be  safe,  98. 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL    BE   ASSESSED    FOR    FAILURE   TO    RETURN 
THIS    BOOK    ON    THE    DATE    CUE.    THE    PENALTY 
WILL  INCREASE  TO   50   CENTS  ON   THE  FOURTH 
DAY     AND     TO     $I.OO     ON     THE     SEVENTH      DAY 
OVERDUE. 

OCT  28  1935 

LD  21-lOOm  7,'33 

'-M-^ 


YD  0555 


I' 


■  6L.3 


.A 


248539 


• 


